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.
Not all companies are created equal, and StockStory is here to surface the ones with real upside. That said, here are three cash-producing companies to steer clear of and a few better alternatives.
Disney (DIS)
Trailing 12-Month Free Cash Flow Margin: 12.2%
Founded by brothers Walt and Roy, Disney (NYSE: DIS) is a multinational entertainment conglomerate, renowned for its theme parks, movies, television networks, and merchandise.
Why Should You Dump DIS?
- Annual sales growth of 3.8% over the last two years lagged behind its consumer discretionary peers as its large revenue base made it difficult to generate incremental demand
- Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 4 percentage points
- Low returns on capital reflect management’s struggle to allocate funds effectively
Disney is trading at $118.75 per share, or 19.8x forward P/E. To fully understand why you should be careful with DIS, check out our full research report (it’s free).
Covenant Logistics (CVLG)
Trailing 12-Month Free Cash Flow Margin: 4.5%
Started with 25 trucks and 50 trailers, Covenant Logistics (NASDAQ: CVLG) is a provider of expedited long haul freight services, offering a range of logistics solutions.
Why Should You Sell CVLG?
- Products and services are facing end-market challenges during this cycle, as seen in its flat sales over the last two years
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 20.4 percentage points
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
Covenant Logistics’s stock price of $24.08 implies a valuation ratio of 11.8x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than CVLG.
CRA (CRAI)
Trailing 12-Month Free Cash Flow Margin: 3%
Often retained for high-stakes matters with multibillion-dollar implications, CRA International (NASDAQ: CRAI) provides economic, financial, and management consulting services to corporations, law firms, and government agencies for litigation, regulatory proceedings, and business strategy.
Why Does CRAI Give Us Pause?
- Revenue base of $712.9 million puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- 7.5 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
At $196.68 per share, CRA trades at 23.8x forward P/E. Read our free research report to see why you should think twice about including CRAI in your portfolio.
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