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.

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.

Bandwidth (BAND)

Trailing 12-Month Free Cash Flow Margin: 8.1%

Powering communications for tech giants like Microsoft, Google, and Zoom, Bandwidth (NASDAQ: BAND) provides cloud-based communications software and APIs that enable businesses to embed voice, messaging, and emergency services into their applications and platforms.

Why Is BAND Risky?

1. Annual revenue growth of 11.9% over the last two years was below our standards for the software sector
2. Bad unit economics and steep infrastructure costs are reflected in its gross margin of 37.2%, one of the worst among software companies
3. Operating margin didn’t move over the last year, showing it couldn’t increase its efficiency

Bandwidth is trading at $49.74 per share, or 1.6x forward price-to-sales. Read our free research report to see why you should think twice about including BAND in your portfolio.

PepsiCo (PEP)

Trailing 12-Month Free Cash Flow Margin: 10%

With a history that goes back more than a century, PepsiCo (NASDAQ: PEP) is a household name in food and beverages today and best known for its flagship soda.

Why Does PEP Give Us Pause?

1. Declining unit sales over the past two years imply it may need to invest in product improvements to get back on track
2. Anticipated sales growth of 3.4% for the next year implies demand will be shaky
3. Earnings growth underperformed the sector average over the last three years as its EPS grew by just 5% annually

PepsiCo’s stock price of $139.24 implies a valuation ratio of 15.9x forward P/E. Check out our free in-depth research report to learn more about why PEP doesn’t pass our bar.

AGCO (AGCO)

Trailing 12-Month Free Cash Flow Margin: 3.2%

With a history that features both organic growth and acquisitions, AGCO (NYSE: AGCO) designs, manufactures, and sells agricultural machinery and related technology.

Why Do We Steer Clear of AGCO?

1. Flat sales over the last five years suggest it must find different ways to grow during this cycle
2. Falling earnings per share over the last five years has some investors worried as stock prices ultimately follow EPS over the long term
3. Eroding returns on capital suggest its historical profit centers are aging

At $102.86 per share, AGCO trades at 15.3x forward P/E. If you’re considering AGCO for your portfolio, see our FREE research report to learn more.

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