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".
Not all profitable companies are created equal, and that’s why we built StockStory - to help you find the ones that truly shine bright. That said, here are three profitable companies to steer clear of and a few better alternatives.
Vestis (VSTS)
Trailing 12-Month GAAP Operating Margin: 2.4%
Operating a network of more than 350 facilities with 3,300 delivery routes serving customers weekly, Vestis (NYSE: VSTS) provides uniform rentals, workplace supplies, and facility services to over 300,000 business locations across the United States and Canada.
Why Do We Avoid VSTS?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 2% annually over the last two years
- Free cash flow margin dropped by 6.1 percentage points over the last four years, implying the company became more capital intensive as competition picked up
- 5× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
Vestis’s stock price of $6.79 implies a valuation ratio of 19.3x forward P/E. Dive into our free research report to see why there are better opportunities than VSTS.
Avery Dennison (AVY)
Trailing 12-Month GAAP Operating Margin: 12.2%
Founded as Kum Kleen Products, Avery Dennison (NYSE: AVY) is a manufacturer of adhesive materials, display graphics, and packaging products, serving various industries.
Why Are We Hesitant About AVY?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Free cash flow margin shrank by 2.5 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
- Waning returns on capital imply its previous profit engines are losing steam
Avery Dennison is trading at $181.15 per share, or 18x forward P/E. If you’re considering AVY for your portfolio, see our FREE research report to learn more.
Interactive Brokers (IBKR)
Trailing 12-Month GAAP Operating Margin: 77.1%
Founded in 1977 and known for its sophisticated trading technology and global reach across 150+ exchanges in 34 countries, Interactive Brokers (NASDAQ: IBKR) is a global electronic broker that provides low-cost trading and investment services across stocks, options, futures, forex, bonds, and other financial instruments.
Why Is IBKR Not Exciting?
- High net-debt-to-EBITDA ratio of 5× could force the company to raise capital at unfavorable terms if market conditions deteriorate
At $64.41 per share, Interactive Brokers trades at 27.5x forward P/E. Dive into our free research report to see why there are better opportunities than IBKR.
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