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.

Caterpillar (CAT)

Trailing 12-Month Free Cash Flow Margin: 13.8%

With its iconic yellow machinery working on construction sites, Caterpillar (NYSE: CAT) manufactures construction equipment like bulldozers, excavators, and parts and maintenance services.

Why Are We Hesitant About CAT?

1. Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
2. Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 5.2%
3. Earnings growth underperformed the sector average over the last two years as its EPS grew by just 2.7% annually

At $504.40 per share, Caterpillar trades at 27.5x forward P/E. If you’re considering CAT for your portfolio, see our FREE research report to learn more.

Ball (BALL)

Trailing 12-Month Free Cash Flow Margin: 3%

Started with a $200 loan in 1880, Ball (NYSE: BLL) manufactures aluminum packaging for beverages, personal care, and household products as well as aerospace systems and other technologies.

Why Are We Out on BALL?

1. Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
2. High input costs result in an inferior gross margin of 21.6% that must be offset through higher volumes
3. Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of -0.6% for the last five years

Ball’s stock price of $47.81 implies a valuation ratio of 12.4x forward P/E. To fully understand why you should be careful with BALL, check out our full research report (it’s free for active Edge members).

Pediatrix Medical Group (MD)

Trailing 12-Month Free Cash Flow Margin: 11.7%

With a network of approximately 2,620 affiliated physicians caring for some of the most vulnerable patients, Pediatrix Medical Group (NYSE: MD) provides specialized physician services focused on neonatal, maternal-fetal, pediatric cardiology and other pediatric subspecialty care across 37 states.

Why Should You Dump MD?

1. Disappointing comparable store sales over the past two years show customers aren’t responding well to its offerings and value proposition
2. Projected sales decline of 1.5% over the next 12 months indicates demand will continue deteriorating
3. Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions

Pediatrix Medical Group is trading at $16.05 per share, or 9x forward P/E. Check out our free in-depth research report to learn more about why MD doesn’t pass our bar.

Stocks We Like More

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