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. That said, here are three cash-producing companies to avoid and some better opportunities instead.
Pegasystems (PEGA)
Trailing 12-Month Free Cash Flow Margin: 28.1%
With a "Center-out Business Architecture" approach that transcends organizational silos, Pegasystems (NASDAQ: PEGA) develops software that helps organizations automate workflows and use artificial intelligence to improve customer experiences and business processes.
Why Is PEGA Not Exciting?
- Annual revenue growth of 11.4% over the last five years was below our standards for the software sector
- Customer acquisition costs take a while to recoup, making it difficult to justify sales and marketing investments that could increase revenue
- Operating profits increased over the last year as the company gained some leverage on its fixed costs and became more efficient
Pegasystems is trading at $42.98 per share, or 3.8x forward price-to-sales. Check out our free in-depth research report to learn more about why PEGA doesn’t pass our bar.
Emerson Electric (EMR)
Trailing 12-Month Free Cash Flow Margin: 12.8%
Founded in 1890, Emerson Electric (NYSE: EMR) is a multinational technology and engineering company providing solutions in the industrial, commercial, and residential markets.
Why Does EMR Fall Short?
- The company has faced growth challenges as its 1.6% annual revenue increases over the last five years fell short of other industrials companies
- Projected sales growth of 5.5% for the next 12 months suggests sluggish demand
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 3.2 percentage points
Emerson Electric’s stock price of $149 implies a valuation ratio of 21.8x forward P/E. Read our free research report to see why you should think twice about including EMR in your portfolio.
CME Group (CME)
Trailing 12-Month Free Cash Flow Margin: 72.4%
Born from the Chicago Mercantile Exchange founded in 1898 as a butter and egg trading venue, CME Group (NASDAQ: CME) operates the world's largest derivatives marketplace where traders can buy and sell futures and options contracts across interest rates, equities, currencies, commodities, and more.
Why Are We Cautious About CME?
- Muted 6% annual revenue growth over the last five years shows its demand lagged behind its financials peers
- Earnings per share lagged its peers over the last two years as they only grew by 9.6% annually
At $304.34 per share, CME Group trades at 25.3x forward P/E. If you’re considering CME for your portfolio, see our FREE research report to learn more.
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