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. That said, here are three profitable companies to steer clear of and a few better alternatives.
Fresh Del Monte Produce (FDP)
Trailing 12-Month GAAP Operating Margin: 3.7%
Translating to "of the mountain" in Spanish, Fresh Del Monte (NYSE: FDP) is a leader in providing high-quality, sustainably grown fresh fruits and vegetables.
Why Do We Steer Clear of FDP?
- Sales stagnated over the last three years and signal the need for new growth strategies
- Easily substituted products (and therefore stiff competition) result in an inferior gross margin of 8.2% that must be offset through higher volumes
- Low returns on capital reflect management’s struggle to allocate funds effectively
Fresh Del Monte Produce’s stock price of $34.76 implies a valuation ratio of 37.4x forward EV-to-EBITDA. To fully understand why you should be careful with FDP, check out our full research report (it’s free for active Edge members).
ScanSource (SCSC)
Trailing 12-Month GAAP Operating Margin: 3.1%
Operating as a crucial link in the technology supply chain since 1992, ScanSource (NASDAQ: SCSC) is a hybrid distributor that connects hardware, software, and cloud services from technology suppliers to resellers and business customers.
Why Should You Dump SCSC?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 11.4% annually over the last two years
- Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term
- Low returns on capital reflect management’s struggle to allocate funds effectively
At $42.15 per share, ScanSource trades at 10.4x forward P/E. Check out our free in-depth research report to learn more about why SCSC doesn’t pass our bar.
Farmer Mac (AGM)
Trailing 12-Month GAAP Operating Margin: 70.4%
Created by Congress in 1987 to build a bridge between Wall Street and rural America, Farmer Mac (NYSE: AGM) provides a secondary market for agricultural and rural loans, helping lenders increase their liquidity and lending capacity to serve rural America.
Why Is AGM Not Exciting?
- Debt-to-equity ratio of 19.8× shows the firm has taken on excessive debt, leaving little room for error
Farmer Mac is trading at $156.33 per share, or 8.6x forward P/E. Dive into our free research report to see why there are better opportunities than AGM.
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