3 Cash-Producing Stocks Walking a Fine Line

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 avoid and some better opportunities instead.

Regal Rexnord (RRX)

Trailing 12-Month Free Cash Flow Margin: 8.8%

Headquartered in Milwaukee, Regal Rexnord (NYSE:RRX) provides power transmission and industrial automation products.

Why Are We Wary of RRX?

1. Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
2. Earnings per share lagged its peers over the last two years as they only grew by 2.6% annually
3. Underwhelming 4.4% return on capital reflects management’s difficulties in finding profitable growth opportunities, and its shrinking returns suggest its past profit sources are losing steam

Regal Rexnord is trading at $223.46 per share, or 20.5x forward P/E. Check out our free in-depth research report to learn more about why RRX doesn’t pass our bar.

Kennametal (KMT)

Trailing 12-Month Free Cash Flow Margin: 5%

Involved in manufacturing hard tips of anti-tank projectiles in World War II, Kennametal (NYSE:KMT) is a provider of industrial materials and tools for various sectors.

Why Are We Out on KMT?

1. Products and services are facing significant end-market challenges during this cycle as sales have declined by 1.1% annually over the last two years
2. Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
3. Earnings growth underperformed the sector average over the last two years as its EPS grew by just 1.9% annually

At $39.30 per share, Kennametal trades at 16x forward P/E. Dive into our free research report to see why there are better opportunities than KMT.

Verizon (VZ)

Trailing 12-Month Free Cash Flow Margin: 14.6%

Formed in 1984 as Bell Atlantic after the breakup of Bell System into seven companies, Verizon (NYSE:VZ) is a telecom giant providing a range of communications and internet services.

Why Should You Sell VZ?

1. Annual sales growth of 1.5% over the last five years lagged behind its consumer discretionary peers as its large revenue base made it difficult to generate incremental demand
2. Free cash flow margin is expected to remain in place over the coming year
3. Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions

Verizon’s stock price of $49.83 implies a valuation ratio of 10.1x forward P/E. To fully understand why you should be careful with VZ, check out our full research report (it’s free).

High-Quality Stocks for All Market Conditions

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