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.

Sherwin-Williams (SHW)

Trailing 12-Month Free Cash Flow Margin: 7.9%

Widely known for its success in the paint industry, Sherwin-Williams (NYSE: SHW) is a manufacturer of paints, coatings, and related products.

Why Does SHW Fall Short?

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 1.1% for the last two years
2. Estimated sales growth of 4.2% for the next 12 months is soft and implies weaker demand
3. Earnings per share lagged its peers over the last two years as they only grew by 5.2% annually

Sherwin-Williams is trading at $312.29 per share, or 27x forward P/E. Check out our free in-depth research report to learn more about why SHW doesn’t pass our bar.

PayPal (PYPL)

Trailing 12-Month Free Cash Flow Margin: 19.3%

Originally spun off from eBay in 2015 after being acquired by the auction giant in 2002, PayPal (NASDAQ: PYPL) operates a global digital payments platform that enables consumers and merchants to send, receive, and process payments online and in person.

Why Do We Think Twice About PYPL?

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 5.6% for the last two years
2. Performance over the past two years shows its incremental sales were less profitable, as its 1.8% annual earnings per share growth trailed its revenue gains

At $44.48 per share, PayPal trades at 8.7x forward P/E. Dive into our free research report to see why there are better opportunities than PYPL.

PulteGroup (PHM)

Trailing 12-Month Free Cash Flow Margin: 10.1%

Having delivered over 850,000 homes since its founding in 1950, PulteGroup (NYSE: PHM) is one of America's largest homebuilders, constructing single-family homes, townhouses, and condominiums for first-time, move-up, and active adult buyers across 46 markets in 25 states.

Why Are We Hesitant About PHM?

1. Product roadmap and go-to-market strategy need to be reconsidered as its backlog has averaged 18.9% declines over the past two years
2. Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term
3. Diminishing returns on capital suggest its earlier profit pools are drying up

PulteGroup’s stock price of $116.96 implies a valuation ratio of 11.9x forward P/E. To fully understand why you should be careful with PHM, check out our full research report (it’s free).

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