While strong cash flow is a key indicator of stability, it doesn’t always translate to superior returns. Some cash-heavy businesses struggle with inefficient spending, slowing demand, or weak competitive positioning.
Cash flow is valuable, but it’s not everything - StockStory helps you identify the companies that truly put it to work. Keeping that in mind, here are three cash-producing companies to avoid and some better opportunities instead.
Alarm.com (ALRM)
Trailing 12-Month Free Cash Flow Margin: 16.9%
Processing over 325 billion data points annually from more than 150 million connected devices, Alarm.com (NASDAQ: ALRM) provides cloud-based platforms that enable residential and commercial property owners to remotely monitor and control their security, video, energy, and other connected devices.
Why Is ALRM Not Exciting?
- Customers had second thoughts about committing to its platform over the last year as its average billings growth of 7.4% underwhelmed
- Estimated sales growth of 3.7% for the next 12 months implies demand will slow from its three-year trend
- High servicing costs result in a relatively inferior gross margin of 65.8% that must be offset through increased usage
Alarm.com is trading at $56.98 per share, or 3.4x forward price-to-sales. Read our free research report to see why you should think twice about including ALRM in your portfolio.
Universal Technical Institute (UTI)
Trailing 12-Month Free Cash Flow Margin: 9.2%
Founded in 1965, Universal Technical Institute (NYSE: UTI) is a leading provider of technical training programs, specializing in automotive, diesel, collision repair, motorcycle, and marine technicians.
Why Are We Out on UTI?
- Estimated sales growth of 9.1% for the next 12 months implies demand will slow from its two-year trend
- Underwhelming 11.5% return on capital reflects management’s difficulties in finding profitable growth opportunities, and its shrinking returns suggest its past profit sources are losing steam
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
At $26.80 per share, Universal Technical Institute trades at 11.9x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why UTI doesn’t pass our bar.
United Airlines (UAL)
Trailing 12-Month Free Cash Flow Margin: 7%
Founded in 1926, United Airlines Holdings (NASDAQ: UAL) operates a global airline network, providing passenger and cargo air transportation services across domestic and international routes.
Why Does UAL Worry Us?
- Number of revenue passenger miles has disappointed over the past two years, indicating weak demand for its offerings
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
United Airlines’s stock price of $97.25 implies a valuation ratio of 9x forward P/E. Dive into our free research report to see why there are better opportunities than UAL.
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