3 Cash-Producing Stocks That Fall Short

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.

DocuSign (DOCU)

Trailing 12-Month Free Cash Flow Margin: 30.2%

Creating the digital equivalent of "sign on the dotted line" for over a billion users worldwide, DocuSign (NASDAQ:DOCU) provides an agreement management platform that enables businesses to electronically prepare, sign, and manage documents and contracts.

Why Are We Wary of DOCU?

1. Customers were hesitant to make long-term commitments to its software as its 8.3% average ARR growth over the last year was sluggish
2. Estimated sales growth of 6.6% for the next 12 months is soft and implies weaker demand
3. Operating profits and efficiency rose over the last year as it benefited from some fixed cost leverage

At $69.85 per share, DocuSign trades at 4.4x forward price-to-sales. Check out our free in-depth research report to learn more about why DOCU doesn’t pass our bar.

Woodward (WWD)

Trailing 12-Month Free Cash Flow Margin: 8.1%

Initially designing controls for water wheels in the early 1900s, Woodward (NASDAQ:WWD) designs, services, and manufactures energy control products and optimization solutions.

Why Does WWD Worry Us?

1. Muted 4.9% annual revenue growth over the last five years shows its demand lagged behind its industrials peers
2. Earnings growth over the last five years fell short of the peer group average as its EPS only increased by 7.1% annually
3. Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 11.2 percentage points

Woodward is trading at $253.74 per share, or 33.4x forward P/E. To fully understand why you should be careful with WWD, check out our full research report (it’s free for active Edge members).

Taylor Morrison Home (TMHC)

Trailing 12-Month Free Cash Flow Margin: 5.8%

Named “America’s Most Trusted Home Builder” in 2019, Taylor Morrison Home (NYSE:TMHC) builds single family homes and communities across the United States.

Why Should You Sell TMHC?

1. Product roadmap and go-to-market strategy need to be reconsidered as its backlog has averaged 12.7% declines over the past two years
2. Projected sales decline of 8.4% for the next 12 months points to an even tougher demand environment ahead
3. Earnings per share have contracted by 2.1% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance

Taylor Morrison Home’s stock price of $60.60 implies a valuation ratio of 8.7x forward P/E. Dive into our free research report to see why there are better opportunities than TMHC.

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