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. That said, here are three cash-producing companies to avoid and some better opportunities instead.
Five9 (FIVN)
Trailing 12-Month Free Cash Flow Margin: 14.1%
Taking its name from the "five nines" (99.999%) standard for optimal service reliability in telecommunications, Five9 (NASDAQ:FIVN) provides cloud-based software that enables businesses to run their contact centers with tools for customer service, sales, and marketing across multiple communication channels.
Why Do We Pass on FIVN?
- Products, pricing, or go-to-market strategy may need some adjustments as its 9.1% average billings growth over the last year was weak
- Estimated sales growth of 10.5% for the next 12 months is soft and implies weaker demand
- Gross margin of 54.9% is way below its competitors, leaving less money to invest in areas like marketing and R&D
Five9 is trading at $33.12 per share, or 2.3x forward price-to-sales. Dive into our free research report to see why there are better opportunities than FIVN.
Coty (COTY)
Trailing 12-Month Free Cash Flow Margin: 6%
With a portfolio boasting many household brands, Coty (NYSE:COTY) is a beauty products powerhouse spanning cosmetics, fragrances, and skincare.
Why Are We Out on COTY?
- 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
- Sales are projected to tank by 1.4% over the next 12 months as demand evaporates
- Revenue growth over the past three years was nullified by the company’s new share issuances as its earnings per share fell by 26.6% annually
Coty’s stock price of $2.95 implies a valuation ratio of 9.3x forward P/E. To fully understand why you should be careful with COTY, check out our full research report (it’s free).
Deckers (DECK)
Trailing 12-Month Free Cash Flow Margin: 20.2%
Established in 1973, Deckers (NYSE:DECK) is a footwear and apparel conglomerate with a portfolio of lifestyle and performance brands.
Why Do We Steer Clear of DECK?
- Weak constant currency growth over the past two years indicates challenges in maintaining its market share
- Subpar operating margin of 23.2% constrains its ability to invest in process improvements or effectively respond to new competitive threats
- Low free cash flow margin of 18.8% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
At $82.70 per share, Deckers trades at 11x forward P/E. Read our free research report to see why you should think twice about including DECK in your portfolio.
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