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".
Profits are valuable, but they’re not everything. At StockStory, we help you identify the companies that have real staying power. That said, here are three profitable companies to steer clear of and a few better alternatives.
Lamb Weston (LW)
Trailing 12-Month GAAP Operating Margin: 10.3%
Best known for its Grown in Idaho brand, Lamb Weston (NYSE:LW) produces and distributes potato products such as frozen french fries and mashed potatoes.
Why Does LW Worry Us?
- Demand is forecasted to shrink as its estimated sales for the next 12 months are flat
- Day-to-day expenses have swelled relative to revenue over the last year as its operating margin fell by 6.2 percentage points
- Low free cash flow margin of 0.8% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
Lamb Weston is trading at $57.74 per share, or 16.8x forward P/E. Check out our free in-depth research report to learn more about why LW doesn’t pass our bar.
Park-Ohio (PKOH)
Trailing 12-Month GAAP Operating Margin: 5.4%
Based in Cleveland, Park-Ohio (NASDAQ:PKOH) provides supply chain management services, capital equipment, and manufactured components.
Why Does PKOH Fall Short?
- Sales stagnated over the last two years and signal the need for new growth strategies
- Gross margin of 15.4% is below its competitors, leaving less money to invest in areas like marketing and R&D
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
At $21.64 per share, Park-Ohio trades at 6.5x forward P/E. Read our free research report to see why you should think twice about including PKOH in your portfolio.
CVS Health (CVS)
Trailing 12-Month GAAP Operating Margin: 2.3%
With over 9,000 retail pharmacy locations serving as neighborhood health destinations across America, CVS Health (NYSE:CVS) operates retail pharmacies, provides pharmacy benefit management services, and offers health insurance through its Aetna subsidiary.
Why Do We Think Twice About CVS?
- 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 6.8% for the last two years
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 4.8% annually while its revenue grew
- 2.9 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
CVS Health’s stock price of $73.70 implies a valuation ratio of 11.4x forward P/E. To fully understand why you should be careful with CVS, check out our full research report (it’s free).
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