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 avoid and some better opportunities instead.
PubMatic (PUBM)
Trailing 12-Month Free Cash Flow Margin: 9%
Founded in 2006 as an online ad platform helping ad sellers, Pubmatic (NASDAQ: PUBM) is a fully integrated cloud-based programmatic advertising platform.
Why Does PUBM Give Us Pause?
- Muted 6.6% annual revenue growth over the last three years shows its demand lagged behind its software peers
- Estimated sales growth of 4.4% for the next 12 months implies demand will slow from its three-year trend
- Steep infrastructure costs and weaker unit economics for a software company are reflected in its low gross margin of 64.9%
At $12.21 per share, PubMatic trades at 2x forward price-to-sales. Dive into our free research report to see why there are better opportunities than PUBM.
Kimball Electronics (KE)
Trailing 12-Month Free Cash Flow Margin: 9.5%
Founded in 1961, Kimball Electronics (NYSE:KE) is a global contract manufacturer specializing in electronics and manufacturing solutions for automotive, medical, and industrial markets.
Why Should You Sell KE?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 5% annually over the last two years
- Falling earnings per share over the last four years has some investors worried as stock prices ultimately follow EPS over the long term
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of -0.3% for the last five years
Kimball Electronics is trading at $18.98 per share, or 17.8x forward P/E. Check out our free in-depth research report to learn more about why KE doesn’t pass our bar.
Penumbra (PEN)
Trailing 12-Month Free Cash Flow Margin: 12.6%
Founded in 2004 to address challenging medical conditions with significant unmet needs, Penumbra (NYSE:PEN) develops and manufactures innovative medical devices for treating vascular diseases and providing immersive healthcare rehabilitation solutions.
Why Are We Wary of PEN?
- Modest revenue base of $1.28 billion gives it less fixed cost leverage and fewer distribution channels than larger companies
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
- ROIC of 0.3% reflects management’s challenges in identifying attractive investment opportunities
Penumbra’s stock price of $255 implies a valuation ratio of 59x forward P/E. Read our free research report to see why you should think twice about including PEN in your portfolio.
Stocks We Like More
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