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. Keeping that in mind, here are three cash-producing companies to avoid and some better opportunities instead.

RH (RH)

Trailing 12-Month Free Cash Flow Margin: 7.3%

Formerly known as Restoration Hardware, RH (NYSE: RH) is a specialty retailer that exclusively sells its own brand of high-end furniture and home decor.

Why Are We Wary of RH?

1. Annual sales declines of 1.4% for the past three years show its products struggled to connect with the market
2. Earnings per share have dipped by 36.2% annually over the past three years, which is concerning because stock prices follow EPS over the long term
3. High net-debt-to-EBITDA ratio of 7× could force the company to raise capital at unfavorable terms if market conditions deteriorate

RH is trading at $118.15 per share, or 20.6x forward P/E. Dive into our free research report to see why there are better opportunities than RH.

Trex (TREX)

Trailing 12-Month Free Cash Flow Margin: 11.5%

Addressing the demand for aesthetically-pleasing and unique outdoor living spaces, Trex Company (NYSE: TREX) makes wood-alternative decking, railing, and patio furniture.

Why Do We Think TREX Will Underperform?

1. Sales trends were unexciting over the last two years as its 3.6% annual growth was below the typical industrials company
2. Costs have risen faster than its revenue over the last five years, causing its operating margin to decline by 5.3 percentage points
3. Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability

At $36.04 per share, Trex trades at 21.6x forward P/E. To fully understand why you should be careful with TREX, check out our full research report (it’s free).

THOR Industries (THO)

Trailing 12-Month Free Cash Flow Margin: 3%

Created through the acquisition and merger of various RV manufacturers, THOR Industries manufactures and sells a range of recreational vehicles, including motorhomes and travel trailers, catering to consumers seeking the freedom and comfort of the RV lifestyle.

Why Do We Avoid THO?

1. Products and services are facing significant end-market challenges during this cycle as sales have declined by 2.2% annually over the last two years
2. Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 4.3% annually
3. Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability

THOR Industries’s stock price of $77.30 implies a valuation ratio of 16.6x forward P/E. Check out our free in-depth research report to learn more about why THO doesn’t pass our bar.

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