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.
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 steer clear of and a few better alternatives.
Paychex (PAYX)
Trailing 12-Month Free Cash Flow Margin: 35.7%
Once known as the go-to service for small business payroll needs, Paychex (NASDAQ: PAYX) provides payroll processing, HR services, employee benefits administration, and insurance solutions to small and medium-sized businesses.
Why Do We Think Twice About PAYX?
- Muted 9.9% annual revenue growth over the last five years shows its demand lagged behind its software peers
- Estimated sales growth of 5.4% for the next 12 months implies demand will slow from its two-year trend
- Costs have risen faster than its revenue over the last year, causing its operating margin to decline by 1.1 percentage points
At $97.36 per share, Paychex trades at 5x forward price-to-sales. Read our free research report to see why you should think twice about including PAYX in your portfolio.
Teradata (TDC)
Trailing 12-Month Free Cash Flow Margin: 39.6%
Pioneering data warehousing technology in the 1980s before "big data" was a common term, Teradata (NYSE: TDC) provides cloud-based data analytics and AI platforms that help large enterprises integrate, analyze, and leverage their data across multiple environments.
Why Should You Dump TDC?
- Average billings growth of 3.7% over the last year was subpar, suggesting it struggled to push its software and might have to lower prices to stimulate demand
- Operating profits fell over the last year as its sales dropped and it struggled to adjust its fixed costs
- Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 20.2 percentage points
Teradata is trading at $31.07 per share, or 1.8x forward price-to-sales. If you’re considering TDC for your portfolio, see our FREE research report to learn more.
Scholastic (SCHL)
Trailing 12-Month Free Cash Flow Margin: 28%
Creator of the legendary Scholastic Book Fair, Scholastic (NASDAQ: SCHL) is an international company specializing in children's publishing, education, and media services.
Why Do We Think SCHL Will Underperform?
- Sales trends were unexciting over the last five years as its 6.4% annual growth was below the typical consumer discretionary company
- Poor free cash flow margin of 13.9% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Scholastic’s stock price of $43.75 implies a valuation ratio of 21.4x forward P/E. To fully understand why you should be careful with SCHL, check out our full research report (it’s free).
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