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.
Luckily for you, we built StockStory to help you separate the good from the bad. That said, here are three cash-producing companies that don’t make the cut and some better opportunities instead.
Unity (U)
Trailing 12-Month Free Cash Flow Margin: 15.8%
Started as a game studio by three friends in a Copenhagen apartment, Unity (NYSE: U) is a software as a service platform that makes it easier to develop and monetize new games and other visual digital experiences.
Why Do We Steer Clear of U?
- Products, pricing, or go-to-market strategy need some adjustments as its billings have averaged 11.3% declines over the last year
- Customers have churned over the last year due to the commoditized nature of its software, as reflected in its 96.8% net revenue retention rate
- Long payback periods on sales and marketing expenses limit customer growth and signal the company operates in a highly competitive environment
At $19.59 per share, Unity trades at 4.4x forward price-to-sales. Read our free research report to see why you should think twice about including U in your portfolio.
Microchip Technology (MCHP)
Trailing 12-Month Free Cash Flow Margin: 20.4%
Spun out from General Instrument in 1987, Microchip Technology (NASDAQ: MCHP) is a leading provider of microcontrollers and integrated circuits used mainly in the automotive world, especially in electric vehicles and their charging devices.
Why Do We Avoid MCHP?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 2.1% annually over the last five years
- Sales are expected to decline once again over the next 12 months as it continues working through a challenging demand environment
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 13.4 percentage points
Microchip Technology is trading at $40.09 per share, or 21.3x forward price-to-earnings. Dive into our free research report to see why there are better opportunities than MCHP.
Fortune Brands (FBIN)
Trailing 12-Month Free Cash Flow Margin: 10.3%
Targeting a wide customer base of residential and commercial customers, Fortune Brands (NYSE: FBIN) makes plumbing, security, and outdoor living products.
Why Are We Out on FBIN?
- Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
- Performance over the past two years shows each sale was less profitable as its earnings per share dropped by 15.2% annually, worse than its revenue
- Free cash flow margin dropped by 8.4 percentage points over the last five years, implying the company became more capital intensive as competition picked up
Fortune Brands’s stock price of $49.94 implies a valuation ratio of 11.1x forward price-to-earnings. Check out our free in-depth research report to learn more about why FBIN doesn’t pass our bar.
Stocks We Like More
Donald Trump’s victory in the 2024 U.S. Presidential Election sent major indices to all-time highs, but stocks have retraced as investors debate the health of the economy and the potential impact of tariffs.
While this leaves much uncertainty around 2025, a few companies are poised for long-term gains regardless of the political or macroeconomic climate, like our Top 5 Strong Momentum Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.
Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,183% between December 2019 and December 2024) as well as under-the-radar businesses like Axon (+711% five-year return). Find your next big winner with StockStory today for free.
