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 avoid and some better opportunities instead.
Watsco (WSO)
Trailing 12-Month GAAP Operating Margin: 10.2%
Originally a manufacturing company, Watsco (NYSE:WSO) today only distributes air conditioning, heating, and refrigeration equipment, as well as related parts and supplies.
Why Are We Out on WSO?
- Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and in-store experience
- Performance over the past two years shows its incremental sales were much less profitable, as its earnings per share fell by 4.2% annually
- Waning returns on capital imply its previous profit engines are losing steam
Watsco is trading at $351.13 per share, or 26.6x forward P/E. Read our free research report to see why you should think twice about including WSO in your portfolio.
Fortive (FTV)
Trailing 12-Month GAAP Operating Margin: 17.2%
Taking its name from the Latin root of "strong", Fortive (NYSE:FTV) manufactures products and develops industrial software for numerous industries.
Why Should You Sell FTV?
- Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
- Earnings per share were flat over the last five years and fell short of the peer group average
- Low returns on capital reflect management’s struggle to allocate funds effectively, and its decreasing returns suggest its historical profit centers are aging
Fortive’s stock price of $50.90 implies a valuation ratio of 17.9x forward P/E. If you’re considering FTV for your portfolio, see our FREE research report to learn more.
L.B. Foster (FSTR)
Trailing 12-Month GAAP Operating Margin: 3.7%
Founded with a $2,500 loan, L.B. Foster (NASDAQ:FSTR) is a provider of products and services for the transportation and energy infrastructure sectors, including rail products, construction materials, and coating solutions.
Why Does FSTR Fall Short?
- Products and services are facing end-market challenges during this cycle, as seen in its flat sales over the last five years
- Earnings per share fell by 31.4% annually over the last five years while its revenue was flat, partly because it diluted shareholders
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
At $27.30 per share, L.B. Foster trades at 6.4x forward EV-to-EBITDA. To fully understand why you should be careful with FSTR, check out our full research report (it’s free for active Edge members).
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