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.

Cash flow is valuable, but it’s not everything - StockStory helps you identify the companies that truly put it to work. That said, here are three cash-producing companies to steer clear of and a few better alternatives.

AbbVie (ABBV)

Trailing 12-Month Free Cash Flow Margin: 33%

Born from a 2013 spinoff of Abbott Laboratories' pharmaceutical business, AbbVie (NYSE: ABBV) is a biopharmaceutical company that develops and markets medications for autoimmune diseases, cancer, neurological disorders, and other complex health conditions.

Why Are We Hesitant About ABBV?

1. Underwhelming constant currency revenue performance over the past two years suggests its product offering at current prices doesn’t resonate with customers
2. Efficiency has decreased over the last five years as its adjusted operating margin fell by 11.4 percentage points
3. Incremental sales over the last five years were less profitable as its earnings per share were flat while its revenue grew

AbbVie’s stock price of $233.85 implies a valuation ratio of 17x forward P/E. If you’re considering ABBV for your portfolio, see our FREE research report to learn more.

Encompass Health (EHC)

Trailing 12-Month Free Cash Flow Margin: 13.3%

With a network of 161 specialized facilities across 37 states and Puerto Rico, Encompass Health (NYSE: EHC) operates inpatient rehabilitation hospitals that help patients recover from strokes, hip fractures, and other debilitating conditions.

Why Does EHC Worry Us?

1. Annual revenue growth of 4.7% over the last five years was below our standards for the healthcare sector
2. Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 1.3 percentage points

At $112.67 per share, Encompass Health trades at 19.9x forward P/E. Dive into our free research report to see why there are better opportunities than EHC.

CME Group (CME)

Trailing 12-Month Free Cash Flow Margin: 63.8%

Born from the Chicago Mercantile Exchange founded in 1898 as a butter and egg trading venue, CME Group (NASDAQ: CME) operates the world's largest derivatives marketplace where traders can buy and sell futures and options contracts across interest rates, equities, currencies, commodities, and more.

Why Is CME Not Exciting?

1. 5.4% annual revenue growth over the last five years was slower than its financials peers
2. Earnings growth over the last five years fell short of the peer group average as its EPS only increased by 9.8% annually

CME Group is trading at $280.38 per share, or 24.6x forward P/E. Check out our free in-depth research report to learn more about why CME doesn’t pass our bar.

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