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.
Luckily for you, we built StockStory to help you separate the good from the bad. Keeping that in mind, here are three cash-producing companies to avoid and some better opportunities instead.
Warner Music Group (WMG)
Trailing 12-Month Free Cash Flow Margin: 12%
Launching the careers of legendary artists like Frank Sinatra, Warner Music Group (NASDAQ:WMG) is a music company managing a diverse portfolio of artists, recordings, and music publishing services worldwide.
Why Do We Think Twice About WMG?
- Annual revenue growth of 4.4% over the last two years was below our standards for the consumer discretionary sector
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 3.7%
- ROIC of 10.6% reflects management’s challenges in identifying attractive investment opportunities
At $29.68 per share, Warner Music Group trades at 10.3x forward EV-to-EBITDA. If you’re considering WMG for your portfolio, see our FREE research report to learn more.
Danaher (DHR)
Trailing 12-Month Free Cash Flow Margin: 20.2%
Born from a real estate investment trust that transformed into a manufacturing powerhouse, Danaher (NYSE:DHR) is a global science and technology company that provides specialized equipment, software, and services for biotechnology, life sciences, and diagnostics.
Why Does DHR Worry Us?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 2.9% annually over the last two years
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Free cash flow margin shrank by 7.9 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
Danaher’s stock price of $202.01 implies a valuation ratio of 25.2x forward P/E. Read our free research report to see why you should think twice about including DHR in your portfolio.
Pfizer (PFE)
Trailing 12-Month Free Cash Flow Margin: 18%
With roots dating back to 1849 when two German immigrants opened a fine chemicals business in Brooklyn, Pfizer (NYSE:PFE) is a global biopharmaceutical company that discovers, develops, manufactures, and sells medicines and vaccines for a wide range of diseases and conditions.
Why Are We Wary of PFE?
- 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
- 11.2 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
- Eroding returns on capital suggest its historical profit centers are aging
Pfizer is trading at $23.83 per share, or 8x forward P/E. Check out our free in-depth research report to learn more about why PFE doesn’t pass our bar.
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