A company that generates cash isn’t automatically a winner. Some businesses stockpile cash but fail to reinvest wisely, limiting their ability to expand.

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 avoid and some better opportunities instead.

American Eagle (AEO)

Trailing 12-Month Free Cash Flow Margin: 4%

With a heavy focus on denim, American Eagle Outfitters (NYSE: AEO) is a specialty retailer offering an assortment of apparel and accessories to young adults.

Why Does AEO Fall Short?

1. 4.3% annual revenue growth over the last six years was slower than its consumer retail peers
2. Estimated sales decline of 2% for the next 12 months implies a challenging demand environment
3. Low returns on capital reflect management’s struggle to allocate funds effectively, and its shrinking returns suggest its past profit sources are losing steam

At $12.25 per share, American Eagle trades at 9.8x forward P/E. If you’re considering AEO for your portfolio, see our FREE research report to learn more.

El Pollo Loco (LOCO)

Trailing 12-Month Free Cash Flow Margin: 4.3%

With a name that translates into ‘The Crazy Chicken’, El Pollo Loco (NASDAQ: LOCO) is a fast food chain known for its citrus-marinated, fire-grilled chicken recipe that hails from the coastal town of Sinaloa, Mexico.

Why Is LOCO Risky?

1. Poor same-store sales performance over the past two years indicates it’s having trouble bringing new diners into its restaurants
2. Revenue base of $479.7 million puts it at a disadvantage compared to larger competitors exhibiting economies of scale
3. Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 4%

El Pollo Loco is trading at $10.08 per share, or 11.9x forward P/E. Dive into our free research report to see why there are better opportunities than LOCO.

Hayward (HAYW)

Trailing 12-Month Free Cash Flow Margin: 15.2%

Credited with introducing the first variable-speed pool pump, Hayward (NYSE: HAYW) makes residential and commercial pool equipment and accessories.

Why Does HAYW Give Us Pause?

1. Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
2. Earnings per share have dipped by 30% annually over the past four years, which is concerning because stock prices follow EPS over the long term
3. 5.9 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

Hayward’s stock price of $15.81 implies a valuation ratio of 20.3x forward P/E. To fully understand why you should be careful with HAYW, check out our full research report (it’s free).

Stocks We Like More

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