A company that generates cash isn’t automatically a winner. Some businesses stockpile cash but fail to reinvest wisely, limiting their ability to expand.

Cash flow is valuable, but it’s not everything - StockStory helps you identify the companies that truly put it to work. Keeping that in mind, here are three cash-producing companies that don’t make the cut and some better opportunities instead.

Central Garden & Pet (CENT)

Trailing 12-Month Free Cash Flow Margin: 9.2%

Enhancing the lives of both pets and homeowners, Central Garden & Pet (NASDAQ: CENT) is a leading producer and distributor of essential products for pet care, lawn and garden maintenance, and pest control.

Why Do We Steer Clear of CENT?

1. Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
2. Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 1.1%
3. Below-average returns on capital indicate management struggled to find compelling investment opportunities

At $38.93 per share, Central Garden & Pet trades at 13.9x forward P/E. If you’re considering CENT for your portfolio, see our FREE research report to learn more.

IAC (IAC)

Trailing 12-Month Free Cash Flow Margin: 1.9%

Originally known as InterActiveCorp and built through Barry Diller's strategic acquisitions since the 1990s, IAC (NASDAQ: IAC) operates a portfolio of category-leading digital businesses including Dotdash Meredith, Angi, and Care.com, focusing on digital publishing, home services, and caregiving platforms.

Why Are We Out on IAC?

1. Products and services are facing end-market challenges during this cycle, as seen in its flat sales over the last five years
2. Performance over the past five years shows each sale was less profitable, as its earnings per share fell by 19.1% annually
3. Push for growth has led to negative returns on capital, signaling value destruction

IAC’s stock price of $37.40 implies a valuation ratio of 21.7x forward P/E. Read our free research report to see why you should think twice about including IAC in your portfolio.

DigitalBridge (DBRG)

Trailing 12-Month Free Cash Flow Margin: 276%

Transforming from a traditional real estate investor to a digital-focused powerhouse in 2021, DigitalBridge Group (NYSE: DBRG) is a global digital infrastructure investment firm that manages capital and operates assets across data centers, cell towers, fiber networks, and edge infrastructure.

Why Do We Think DBRG Will Underperform?

1. Customers postponed purchases of its products and services this cycle as its revenue declined by 68.3% annually over the last five years
2. Earnings per share have contracted by 14.1% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance
3. Negative earnings profile makes it challenging to secure favorable financing terms from lenders

DigitalBridge is trading at $15.45 per share, or 2.2x forward P/E. To fully understand why you should be careful with DBRG, check out our full research report (it’s free).

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