Generating cash is essential for any business, but not all cash-rich companies are great investments. Some produce plenty of cash but fail to allocate it effectively, leading to missed opportunities.
Cash flow is valuable, but it’s not everything - StockStory helps you identify the companies that truly put it to work. That said, here are three cash-producing companies to steer clear of and a few better alternatives.
AbbVie (ABBV)
Trailing 12-Month Free Cash Flow Margin: 33%
Born from a 2013 spinoff of Abbott Laboratories' pharmaceutical business, AbbVie (NYSE:ABBV) is a biopharmaceutical company that develops and markets medications for autoimmune diseases, cancer, neurological disorders, and other complex health conditions.
Why Are We Hesitant About ABBV?
- Underwhelming constant currency revenue performance over the past two years suggests its product offering at current prices doesn’t resonate with customers
- Efficiency has decreased over the last five years as its adjusted operating margin fell by 11.4 percentage points
- Incremental sales over the last five years were less profitable as its earnings per share were flat while its revenue grew
AbbVie’s stock price of $233.85 implies a valuation ratio of 17x forward P/E. If you’re considering ABBV for your portfolio, see our FREE research report to learn more.
Encompass Health (EHC)
Trailing 12-Month Free Cash Flow Margin: 13.3%
With a network of 161 specialized facilities across 37 states and Puerto Rico, Encompass Health (NYSE:EHC) operates inpatient rehabilitation hospitals that help patients recover from strokes, hip fractures, and other debilitating conditions.
Why Does EHC Worry Us?
- Annual revenue growth of 4.7% over the last five years was below our standards for the healthcare sector
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 1.3 percentage points
At $112.67 per share, Encompass Health trades at 19.9x forward P/E. Dive into our free research report to see why there are better opportunities than EHC.
CME Group (CME)
Trailing 12-Month Free Cash Flow Margin: 63.8%
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 Is CME Not Exciting?
- 5.4% annual revenue growth over the last five years was slower than its financials peers
- Earnings growth over the last five years fell short of the peer group average as its EPS only increased by 9.8% annually
CME Group is trading at $280.38 per share, or 24.6x forward P/E. Check out our free in-depth research report to learn more about why CME doesn’t pass our bar.
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