Not all profitable companies are built to last - some rely on outdated models or unsustainable advantages. Just because a business is in the green today doesn’t mean it will thrive tomorrow.
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.
Pegasystems (PEGA)
Trailing 12-Month GAAP Operating Margin: 16.4%
With a "Center-out Business Architecture" approach that transcends organizational silos, Pegasystems (NASDAQ: PEGA) develops software that helps organizations automate workflows and use artificial intelligence to improve customer experiences and business processes.
Why Do We Think Twice About PEGA?
- Products, pricing, or go-to-market strategy may need some adjustments as its 13.5% average billings growth over the last year was weak
- Estimated sales growth of 3.6% for the next 12 months implies demand will slow from its two-year trend
- Long payback periods on sales and marketing expenses limit customer growth and signal the company operates in a highly competitive environment
Pegasystems’s stock price of $58.66 implies a valuation ratio of 6.2x forward price-to-sales. To fully understand why you should be careful with PEGA, check out our full research report (it’s free).
Central Garden & Pet (CENT)
Trailing 12-Month GAAP Operating Margin: 8.1%
Enhancing the lives of both pets and homeowners, Central Garden & Pet (NASDAQ: CENT) is a leading producer and distributor of essential products for pet care, lawn and garden maintenance, and pest control.
Why Should You Dump CENT?
- 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
- Sales are projected to be flat over the next 12 months and imply weak demand
- ROIC of 9.1% reflects management’s challenges in identifying attractive investment opportunities, and its decreasing returns suggest its historical profit centers are aging
Central Garden & Pet is trading at $33.23 per share, or 12.3x forward P/E. Read our free research report to see why you should think twice about including CENT in your portfolio.
Flowers Foods (FLO)
Trailing 12-Month GAAP Operating Margin: 7.3%
With Wonder Bread as its premier brand, Flower Foods (NYSE: FLO) is a packaged foods company that focuses on bakery products such as breads, buns, and cakes.
Why Does FLO Give Us Pause?
- Falling unit sales over the past two years indicate demand is soft and that the company may need to revise its product strategy
- Operating margin of 5.6% falls short of the industry average, and the smaller profit dollars make it harder to react to unexpected market developments
- Falling earnings per share over the last three years has some investors worried as stock prices ultimately follow EPS over the long term
At $12.79 per share, Flowers Foods trades at 11.6x forward P/E. If you’re considering FLO for your portfolio, see our FREE research report to learn more.
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