3 Cash-Producing Stocks We Steer Clear Of

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 to avoid and some better opportunities instead.

Brinker International (EAT)

Trailing 12-Month Free Cash Flow Margin: 8.4%

Founded by Norman Brinker in Dallas, Brinker International (NYSE:EAT) is a casual restaurant chain that operates the Chili’s, Maggiano’s Little Italy, and It’s Just Wings banners.

Why Is EAT Not Exciting?

1. Conservative approach to adding new restaurants shows management is focused on improving existing location performance
2. Estimated sales growth of 3.7% for the next 12 months implies demand will slow from its six-year trend
3. Gross margin of 17% reflects the bad unit economics inherent in most restaurant businesses

At $161.79 per share, Brinker International trades at 15.1x forward P/E. If you’re considering EAT for your portfolio, see our FREE research report to learn more.

FedEx (FDX)

Trailing 12-Month Free Cash Flow Margin: 3.4%

Sporting one of the largest air cargo fleets in the world, FedEx (NYSE:FDX) is a global provider of parcel and cargo delivery services.

Why Is FDX Risky?

1. Scale is a double-edged sword because it limits the company’s growth potential compared to its smaller competitors, as reflected in its below-average annual revenue increases of 1.2% for the last two years
2. Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
3. Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value

FedEx’s stock price of $309.65 implies a valuation ratio of 15.8x forward P/E. Check out our free in-depth research report to learn more about why FDX doesn’t pass our bar.

Align Technology (ALGN)

Trailing 12-Month Free Cash Flow Margin: 15.5%

Pioneering an alternative to traditional metal braces with nearly invisible plastic aligners, Align Technology (NASDAQ:ALGN) designs and manufactures Invisalign clear aligners, iTero intraoral scanners, and dental CAD/CAM software for orthodontic and restorative treatments.

Why Does ALGN Worry Us?

1. Underwhelming clear aligner shipments over the past two years suggest it might have to lower prices to accelerate growth
2. Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 9.4 percentage points
3. Diminishing returns on capital suggest its earlier profit pools are drying up

Align Technology is trading at $168.85 per share, or 15.6x forward P/E. To fully understand why you should be careful with ALGN, check out our full research report (it’s free).

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