Even if a company is profitable, it doesn’t always mean it’s a great investment. Some struggle to maintain growth, face looming threats, or fail to reinvest wisely, limiting their future potential.
Profits are valuable, but they’re not everything. At StockStory, we help you identify the companies that have real staying power. Keeping that in mind, here are three profitable companies to steer clear of and a few better alternatives.
Salesforce (CRM)
Trailing 12-Month GAAP Operating Margin: 20.2%
With its cloud-based platform named after its stock ticker symbol CRM (Customer Relationship Management), Salesforce (NYSE: CRM) provides customer relationship management software that helps businesses connect with their customers across sales, service, marketing, and commerce.
Why Does CRM Worry Us?
- Average ARR growth of 9% over the last year has disappointed, suggesting it’s had a hard time winning long-term deals and renewals
- Projected sales growth of 8.9% for the next 12 months suggests sluggish demand
- Operating margin expanded by 2.1 percentage points over the last year as it scaled and became more efficient
Salesforce is trading at $244.50 per share, or 5.5x forward price-to-sales. If you’re considering CRM for your portfolio, see our FREE research report to learn more.
Travel + Leisure (TNL)
Trailing 12-Month GAAP Operating Margin: 19.7%
Formerly known as Wyndham Destinations, Travel + Leisure (NYSE: TNL) is a global vacation company that provides travelers with vacation ownership, exchange, and travel services.
Why Are We Cautious About TNL?
- Demand for its offerings was relatively low as its number of tours conducted has underwhelmed
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
- High net-debt-to-EBITDA ratio of 8× could force the company to raise capital at unfavorable terms if market conditions deteriorate
At $63.96 per share, Travel + Leisure trades at 8.9x forward P/E. Check out our free in-depth research report to learn more about why TNL doesn’t pass our bar.
Matthews (MATW)
Trailing 12-Month GAAP Operating Margin: 5.2%
Originally a death care company, Matthews International (NASDAQ: MATW) is a diversified company offering ceremonial services, brand solutions and industrial technologies.
Why Do We Steer Clear of MATW?
- Products and services have few die-hard fans as sales have declined by 6.5% annually over the last two years
- Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 14.8% annually
- Negative free cash flow raises questions about the return timeline for its investments
Matthews’s stock price of $23.59 implies a valuation ratio of 17.6x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including MATW in your portfolio.
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