Generating cash is essential for any business, but not all cash-rich companies are great investments. Some produce plenty of cash but fail to allocate it effectively, leading to missed opportunities.

Not all companies are created equal, and StockStory is here to surface the ones with real upside. Keeping that in mind, here are three cash-producing companies to avoid and some better opportunities instead.

Macy's (M)

Trailing 12-Month Free Cash Flow Margin: 3.5%

With a storied history that began with its 1858 founding, Macy’s (NYSE: M) is a department store chain that sells clothing, cosmetics, accessories, and home goods.

Why Is M Risky?

1. Recent store closures and weak same-store sales point to soft demand and an operational restructuring
2. Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its brick-and-mortar locations
3. Falling earnings per share over the last three years has some investors worried as stock prices ultimately follow EPS over the long term

Macy's is trading at $22.23 per share, or 10.8x forward P/E. Dive into our free research report to see why there are better opportunities than M.

Matrix Service (MTRX)

Trailing 12-Month Free Cash Flow Margin: 8.8%

Founded in Oklahoma, Matrix Service (NASDAQ: MTRX) provides engineering, fabrication, construction, and maintenance services primarily to the energy and industrial markets.

Why Is MTRX Not Exciting?

1. Products and services are facing significant end-market challenges during this cycle as sales have declined by 2.9% annually over the last five years
2. Gross margin of 3.8% is below its competitors, leaving less money to invest in areas like marketing and R&D
3. Issuance of new shares over the last five years caused its earnings per share to fall by 66.3% annually, even worse than its revenue declines

Matrix Service’s stock price of $11.97 implies a valuation ratio of 22.2x forward P/E. Read our free research report to see why you should think twice about including MTRX in your portfolio.

DaVita (DVA)

Trailing 12-Month Free Cash Flow Margin: 9.7%

With over 2,600 dialysis centers across the United States and a presence in 13 countries, DaVita (NYSE: DVA) operates a network of dialysis centers providing treatment and care for patients with chronic kidney disease and end-stage kidney disease.

Why Are We Cautious About DVA?

1. Annual sales growth of 2.9% over the last five years lagged behind its healthcare peers as its large revenue base made it difficult to generate incremental demand
2. Flat treatments over the past two years imply it may need to invest in improvements to get back on track
3. Estimated sales growth of 3.7% for the next 12 months implies demand will slow from its two-year trend

At $117.72 per share, DaVita trades at 9.6x forward P/E. If you’re considering DVA for your portfolio, see our FREE research report to learn more.

Stocks We Like More

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