A company with profits isn’t always a great investment. Some struggle to maintain growth, face looming threats, or fail to reinvest wisely, limiting their future potential.

A business making money today isn’t necessarily a winner, which is why we analyze companies across multiple dimensions at StockStory. Keeping that in mind, here are three profitable companies to steer clear of and a few better alternatives.

FormFactor (FORM)

Trailing 12-Month GAAP Operating Margin: 6.1%

With customers across the foundry and fabless markets, FormFactor (NASDAQ: FORM) is a US-based provider of test and measurement technologies for semiconductors.

Why Are We Out on FORM?

1. 4.4% annual revenue growth over the last five years was slower than its semiconductor peers
2. Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 2.4%
3. Expenses have increased as a percentage of revenue over the last five years as its operating margin fell by 6.1 percentage points

FormFactor’s stock price of $30.35 implies a valuation ratio of 20.5x forward P/E. Read our free research report to see why you should think twice about including FORM in your portfolio.

Orion (ORN)

Trailing 12-Month GAAP Operating Margin: 1.5%

Established in 1994, Orion (NYSE: ORN) provides construction services for marine infrastructure and industrial projects.

Why Do We Avoid ORN?

1. Sales trends were unexciting over the last five years as its 2.4% annual growth was below the typical industrials company
2. Earnings per share fell by 10.1% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
3. Low free cash flow margin of -0.2% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders

At $8.10 per share, Orion trades at 49.9x forward P/E. Dive into our free research report to see why there are better opportunities than ORN.

Kennametal (KMT)

Trailing 12-Month GAAP Operating Margin: 8.7%

Involved in manufacturing hard tips of anti-tank projectiles in World War II, Kennametal (NYSE: KMT) is a provider of industrial materials and tools for various sectors.

Why Do We Steer Clear of KMT?

1. Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
2. Estimated sales for the next 12 months are flat and imply a softer demand environment
3. Earnings per share have dipped by 1.8% annually over the past five years, which is concerning because stock prices follow EPS over the long term

Kennametal is trading at $21 per share, or 17.5x forward P/E. Check out our free in-depth research report to learn more about why KMT doesn’t pass our bar.

High-Quality Stocks for All Market Conditions

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