While profitability is essential, it doesn’t guarantee long-term success. Some companies that rest on their margins will lose ground as competition intensifies - as Jeff Bezos said, "Your margin is my opportunity".
A business making money today isn’t necessarily a winner, which is why we analyze companies across multiple dimensions at StockStory. That said, here are three profitable companies to steer clear of and a few better alternatives.
Thermon (THR)
Trailing 12-Month GAAP Operating Margin: 16.4%
Creating the first packaged tracing systems, Thermon (NYSE: THR) is a leading provider of engineered industrial process heating solutions for process industries.
Why Are We Cautious About THR?
- Annual revenue growth of 3.5% over the last two years was below our standards for the industrials sector
- Estimated sales growth of 4% for the next 12 months is soft and implies weaker demand
- Earnings growth underperformed the sector average over the last two years as its EPS grew by just 5.6% annually
Thermon is trading at $32.76 per share, or 9.4x forward EV-to-EBITDA. If you’re considering THR for your portfolio, see our FREE research report to learn more.
Kratos (KTOS)
Trailing 12-Month GAAP Operating Margin: 1.6%
Established with a commitment to supporting national security, Kratos (NASDAQ: KTOS) is a provider of advanced engineering, technology, and security solutions tailored for critical national security applications.
Why Does KTOS Worry Us?
- Free cash flow margin dropped by 9 percentage points over the last five years, implying the company became more capital intensive as competition picked up
- ROIC of 3.2% reflects management’s challenges in identifying attractive investment opportunities, and its decreasing returns suggest its historical profit centers are aging
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
Kratos’s stock price of $67.17 implies a valuation ratio of 95.3x forward P/E. Read our free research report to see why you should think twice about including KTOS in your portfolio.
AT&T (T)
Trailing 12-Month GAAP Operating Margin: 19%
Founded by Alexander Graham Bell, AT&T (NYSE: T) is a multinational telecomm conglomerate providing a range of communications and internet services.
Why Are We Out on T?
- Annual sales declines of 5.6% for the past five years show its products and services struggled to connect with the market
- Performance over the past five years shows each sale was less profitable as its earnings per share dropped by 8.5% annually, worse than its revenue
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
At $25.47 per share, AT&T trades at 11.8x forward P/E. To fully understand why you should be careful with T, check out our full research report (it’s free for active Edge members).
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