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.
Western Digital (WDC)
Trailing 12-Month Free Cash Flow Margin: 19.2%
Founded in 1970 by a Motorola employee, Western Digital (NASDAQ: WDC) is a leading producer of hard disk drives, SSDs and flash memory.
Why Does WDC Give Us Pause?
- Annual sales declines of 9.4% for the past five years show its products and services struggled to connect with the market during this cycle
- Gross margin of 14.9% is below its competitors, leaving less money to invest in areas like marketing and R&D
- ROIC of 6.6% reflects management’s challenges in identifying attractive investment opportunities
Western Digital is trading at $170.50 per share, or 21.2x forward P/E. Read our free research report to see why you should think twice about including WDC in your portfolio.
Accel Entertainment (ACEL)
Trailing 12-Month Free Cash Flow Margin: 3.7%
Established in Illinois, Accel Entertainment (NYSE:ACEL) is a provider of electronic gaming machines and interactive amusement terminals to bars and entertainment venues.
Why Do We Think Twice About ACEL?
- Demand for its offerings was relatively low as its number of video gaming terminals sold has underwhelmed
- Estimated sales growth of 4.9% for the next 12 months implies demand will slow from its two-year trend
- Low free cash flow margin of 4.8% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
At $10.47 per share, Accel Entertainment trades at 10.4x forward P/E. To fully understand why you should be careful with ACEL, check out our full research report (it’s free for active Edge members).
Dover (DOV)
Trailing 12-Month Free Cash Flow Margin: 12.8%
A company that manufactured critical equipment for the United States military during World War II, Dover (NYSE:DOV) manufactures engineered components and specialized equipment for numerous industries.
Why Does DOV Worry Us?
- Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
- Earnings growth over the last two years fell short of the peer group average as its EPS only increased by 4.7% annually
- Diminishing returns on capital suggest its earlier profit pools are drying up
Dover’s stock price of $184.73 implies a valuation ratio of 17.8x forward P/E. Dive into our free research report to see why there are better opportunities than DOV.
High-Quality Stocks for All Market Conditions
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