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 that don’t make the cut and some better opportunities instead.
Nike (NKE)
Trailing 12-Month Free Cash Flow Margin: 2.3%
Originally selling Japanese Onitsuka Tiger sneakers as Blue Ribbon Sports, Nike (NYSE: NKE) is a global titan in athletic footwear, apparel, equipment, and accessories.
Why Do We Think NKE Will Underperform?
- Underwhelming constant currency revenue performance over the past two years suggests its product offering at current prices doesn’t resonate with customers
- Free cash flow margin is expected to increase by 1.6 percentage points next year, suggesting the company will have more capital to invest or return to shareholders
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Nike is trading at $42.68 per share, or 26.9x forward P/E. Read our free research report to see why you should think twice about including NKE in your portfolio.
AT&T (T)
Trailing 12-Month Free Cash Flow Margin: 15.5%
Founded by Alexander Graham Bell, AT&T (NYSE: T) is a multinational telecomm conglomerate providing a range of communications and internet services.
Why Should You Dump T?
- Sales were flat over the last five years, indicating it’s failed to expand its business
- Earnings per share fell by 7.9% annually over the last five years while its revenue was flat, showing each sale was less profitable
- Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 1.4 percentage points
AT&T’s stock price of $26.48 implies a valuation ratio of 11.7x forward P/E. Dive into our free research report to see why there are better opportunities than T.
Zimmer Biomet (ZBH)
Trailing 12-Month Free Cash Flow Margin: 14.2%
With a history dating back to 1927 and a presence in over 100 countries worldwide, Zimmer Biomet (NYSE: ZBH) designs and manufactures orthopedic products including knee and hip replacements, surgical tools, and robotic technologies for joint reconstruction and spine surgeries.
Why Is ZBH Not Exciting?
- 4.5% annual revenue growth over the last five years was slower than its healthcare peers
- Estimated sales growth of 3.9% for the next 12 months implies demand will slow from its two-year trend
- ROIC of 4.1% reflects management’s challenges in identifying attractive investment opportunities
At $93.50 per share, Zimmer Biomet trades at 11.1x forward P/E. Check out our free in-depth research report to learn more about why ZBH doesn’t pass our bar.
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