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".
A business making money today isn’t necessarily a winner, which is why we analyze companies across multiple dimensions at StockStory. That said, here are three profitable companies to avoid and some better opportunities instead.
MGP Ingredients (MGPI)
Trailing 12-Month GAAP Operating Margin: 3.6%
Headquartered in Atchison, Kansas, MGP Ingredients (NASDAQ: MGPI) is a leading supplier of high-quality ingredients to the food and beverage industry
Why Do We Steer Clear of MGPI?
- Sales tumbled by 6% annually over the last three years, showing consumer trends are working against its favor
- Sales are projected to tank by 15.8% over the next 12 months as its demand continues evaporating
- Inability to adjust its cost structure while its revenue declined over the last year led to a 13.6 percentage point drop in the company’s operating margin
At $24.68 per share, MGP Ingredients trades at 9.9x forward P/E. If you’re considering MGPI for your portfolio, see our FREE research report to learn more.
LKQ (LKQ)
Trailing 12-Month GAAP Operating Margin: 8.4%
A global distributor of vehicle parts and accessories, LKQ (NASDAQ: LKQ) offers its customers a comprehensive selection of high-quality, affordably priced automobile products.
Why Do We Think LKQ Will Underperform?
- 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
- Estimated sales growth of 1.2% for the next 12 months implies demand will slow from its two-year trend
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
LKQ’s stock price of $29.43 implies a valuation ratio of 9.2x forward P/E. Check out our free in-depth research report to learn more about why LKQ doesn’t pass our bar.
American Airlines (AAL)
Trailing 12-Month GAAP Operating Margin: 3.8%
One of the ‘Big Four’ airlines in the US, American Airlines (NASDAQ: AAL) is a major global air carrier that serves both business and leisure travelers through its domestic and international flights.
Why Should You Dump AAL?
- Sluggish trends in its revenue passenger miles suggest customers aren’t adopting its solutions as quickly as the company hoped
- Underwhelming 3.3% return on capital reflects management’s difficulties in finding profitable growth opportunities
- 6× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
American Airlines is trading at $11.90 per share, or 11.7x forward P/E. To fully understand why you should be careful with AAL, check out our full research report (it’s free for active Edge members).
Stocks We Like More
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