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”.

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.

Chewy (CHWY)

Trailing 12-Month GAAP Operating Margin: 2.4%

Founded by Ryan Cohen, who later became known for his involvement in GameStop, Chewy (NYSE: CHWY) is an online retailer specializing in pet food, supplies, and healthcare services.

Why Is CHWY Not Exciting?

1. Scale is a double-edged sword because it limits the company’s growth potential compared to its smaller competitors, as reflected in its below-average annual revenue increases of 7.1% for the last three years
2. Projected sales growth of 6.8% for the next 12 months suggests sluggish demand
3. High servicing costs result in an inferior gross margin of 29.6% that must be offset through higher volumes

Chewy is trading at $19.40 per share, or 8.2x forward EV/EBITDA. Check out our free in-depth research report to learn more about why CHWY doesn’t pass our bar.

Park-Ohio (PKOH)

Trailing 12-Month GAAP Operating Margin: 5.6%

Based in Cleveland, Park-Ohio (NASDAQ: PKOH) provides supply chain management services, capital equipment, and manufactured components.

Why Does PKOH Give Us Pause?

1. Customers postponed purchases of its products and services this cycle as its revenue declined by 1.2% annually over the last two years
2. Performance over the past two years was negatively impacted by new share issuances as its earnings per share dropped by 8.3% annually, worse than its revenue
3. Cash-burning tendencies make us wonder if it can sustainably generate shareholder value

At $38.08 per share, Park-Ohio trades at 12.1x forward P/E. If you’re considering PKOH for your portfolio, see our FREE research report to learn more.

Fortune Brands (FBIN)

Trailing 12-Month GAAP Operating Margin: 10.8%

Targeting a wide customer base of residential and commercial customers, Fortune Brands (NYSE: FBIN) makes plumbing, security, and outdoor living products.

Why Are We Out on FBIN?

1. Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
2. Sales are expected to decline once again over the next 12 months as it continues working through a challenging demand environment
3. Earnings per share have dipped by 6% annually over the past five years, which is concerning because stock prices follow EPS over the long term

Fortune Brands’s stock price of $50.28 implies a valuation ratio of 14x forward P/E. To fully understand why you should be careful with FBIN, check out our full research report (it’s free).

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