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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.

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.

Hormel Foods (HRL)

Trailing 12-Month Free Cash Flow Margin: 7.5%

Best known for its SPAM brand, Hormel (NYSE:HRL) is a packaged foods company with products that span meat, poultry, shelf-stable foods, and spreads.

Why Does HRL Give Us Pause?

1. Shrinking unit sales over the past two years suggest it might have to lower prices to stimulate growth

2. Easily substituted products (and therefore stiff competition) result in an inferior gross margin of 16.7% that must be offset through higher volumes

3. Performance over the past three years shows each sale was less profitable, as its earnings per share fell by 4.9% annually

Hormel Foods’s stock price of $29.36 implies a valuation ratio of 17.1x forward P/E. Dive into our free research report to see why there are better opportunities than HRL.

ICF International (ICFI)

Trailing 12-Month Free Cash Flow Margin: 6.4%

Operating at the intersection of policy, technology, and implementation for over five decades, ICF International (NASDAQ:ICFI) provides professional consulting services and technology solutions to government agencies and commercial clients across energy, health, environment, and security sectors.

Why Do We Avoid ICFI?

1. New orders were hard to come by as its average backlog growth of 1.6% over the past two years underwhelmed

2. Estimated sales decline of 7.4% for the next 12 months implies a challenging demand environment

3. Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 5.2 percentage points

ICF International is trading at $84.46 per share, or 12.2x forward P/E. To fully understand why you should be careful with ICFI, check out our full research report (it’s free).

Standex (SXI)

Trailing 12-Month Free Cash Flow Margin: 5.1%

Holding over 500 patents globally, Standex (NYSE:SXI) is a manufacturer and distributor of industrial components for various sectors.

Why Are We Wary of SXI?

1. Products and services are facing end-market challenges during this cycle, as seen in its flat sales over the last two years

2. Earnings per share lagged its peers over the last two years as they only grew by 5.9% annually

3. 3.2 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position