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 steer clear of and a few better alternatives.
8x8 (EGHT)
Trailing 12-Month Free Cash Flow Margin: 7.8%
Founded in 1987, 8x8 (NYSE:EGHT) provides software for organizations to efficiently communicate and collaborate with their customers, employees, and partners.
Why Do We Pass on EGHT?
- Offerings couldn’t generate interest over the last year as its billings have averaged 2.1% declines
- Projected sales are flat for the next 12 months, implying demand will slow from its three-year trend
- Customer acquisition costs take a while to recoup, making it difficult to justify sales and marketing investments that could increase revenue
8x8’s stock price of $1.94 implies a valuation ratio of 0.4x forward price-to-sales. Dive into our free research report to see why there are better opportunities than EGHT.
Universal Technical Institute (UTI)
Trailing 12-Month Free Cash Flow Margin: 9.1%
Founded in 1965, Universal Technical Institute (NYSE: UTI) is a leading provider of technical training programs, specializing in automotive, diesel, collision repair, motorcycle, and marine technicians.
Why Do We Think UTI Will Underperform?
- Subpar operating margin of 7.8% constrains its ability to invest in process improvements or effectively respond to new competitive threats
- Free cash flow margin is forecasted to shrink by 1.7 percentage points in the coming year, suggesting the company will consume more capital to keep up with its competitors
- ROIC of 9.2% reflects management’s challenges in identifying attractive investment opportunities
At $33.15 per share, Universal Technical Institute trades at 15.4x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why UTI doesn’t pass our bar.
Knowles (KN)
Trailing 12-Month Free Cash Flow Margin: 19.2%
With roots dating back to 1946 and a focus on components that must perform flawlessly in critical situations, Knowles (NYSE:KN) designs and manufactures specialized electronic components like high-performance capacitors, microphones, and speakers for medical technology, defense, and industrial applications.
Why Do We Steer Clear of KN?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 6.2% annually over the last four years
- Projected sales decline of 7.2% over the next 12 months indicates demand will continue deteriorating
- Flat earnings per share over the last five years underperformed the sector average
Knowles is trading at $17.25 per share, or 15.6x forward P/E. Read our free research report to see why you should think twice about including KN in your portfolio.
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