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.
Coty (COTY)
Trailing 12-Month Free Cash Flow Margin: 5.4%
With a portfolio boasting many household brands, Coty (NYSE:COTY) is a beauty products powerhouse spanning cosmetics, fragrances, and skincare.
Why Is COTY Risky?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Estimated sales decline of 1.2% for the next 12 months implies a challenging demand environment
- Incremental sales over the last three years were much less profitable as its earnings per share fell by 29.3% annually while its revenue grew
At $2.69 per share, Coty trades at 8.4x forward P/E. Check out our free in-depth research report to learn more about why COTY doesn’t pass our bar.
Choice Hotels (CHH)
Trailing 12-Month Free Cash Flow Margin: 6.2%
With almost 100% of its properties under franchise agreements, Choice Hotels (NYSE:CHH) is a hotel franchisor known for its diverse brand portfolio including Comfort Inn, Quality Inn, and Clarion.
Why Are We Out on CHH?
- Revenue per room has disappointed over the past two years due to weaker trends in its daily rates and occupancy levels
- Poor free cash flow margin of 8.8% 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
Choice Hotels’s stock price of $111.36 implies a valuation ratio of 15.8x forward P/E. To fully understand why you should be careful with CHH, check out our full research report (it’s free).
Planet Fitness (PLNT)
Trailing 12-Month Free Cash Flow Margin: 19.2%
Founded by two brothers who purchased a struggling gym, Planet Fitness (NYSE:PLNT) is a gym franchise that caters to casual fitness users by providing a friendly and inclusive atmosphere.
Why Do We Steer Clear of PLNT?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Capital intensity will likely increase as its free cash flow margin is anticipated to drop by 4.8 percentage points over the next year
- Stagnant returns on capital show management has failed to improve the company’s business quality
Planet Fitness is trading at $55.99 per share, or 17.3x forward P/E. Read our free research report to see why you should think twice about including PLNT in your portfolio.
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