Not all profitable companies are built to last - some rely on outdated models or unsustainable advantages.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.

Not all profitable companies are created equal, and that’s why we built StockStory - to help you find the ones that truly shine bright. That said, here are three profitable companies to avoid and some better opportunities instead.

Walmart (WMT)

Trailing 12-Month GAAP Operating Margin: 4.2%

Known for its large-format Supercenters, Walmart (NYSE: WMT) is a retail pioneer that serves a budget-conscious consumer who is looking for a wide range of products under one roof.

Why Do We Think Twice About WMT?

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 5% for the last six years
2. Commoditized inventory, bad unit economics, and high competition are reflected in its low gross margin of 24.8%
3. Performance over the past six years shows its incremental sales were much less profitable, as its earnings per share fell by 6.7% annually

Walmart’s stock price of $106.01 implies a valuation ratio of 38.5x forward P/E. Read our free research report to see why you should think twice about including WMT in your portfolio.

Constellation Brands (STZ)

Trailing 12-Month GAAP Operating Margin: 23.2%

With a presence in more than 100 countries, Constellation Brands (NYSE: STZ) is a globally renowned producer and marketer of beer, wine, and spirits.

Why Does STZ Fall Short?

1. Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
2. Sales are projected to tank by 6.1% over the next 12 months as demand evaporates further
3. Below-average returns on capital indicate management struggled to find compelling investment opportunities, and its falling returns suggest its earlier profit pools are drying up

Constellation Brands is trading at $140.15 per share, or 11.7x forward P/E. Dive into our free research report to see why there are better opportunities than STZ.

Ralph Lauren (RL)

Trailing 12-Month GAAP Operating Margin: 13.7%

Originally founded as a necktie company, Ralph Lauren (NYSE: RL) is an iconic American fashion brand known for its classic and sophisticated style.

Why Is RL Not Exciting?

1. Weak constant currency growth over the past two years indicates challenges in maintaining its market share
2. Estimated sales growth of 5.6% for the next 12 months is soft and implies weaker demand
3. Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 4.4 percentage points

At $340 per share, Ralph Lauren trades at 22x forward P/E. If you’re considering RL for your portfolio, see our FREE research report to learn more.

Stocks We Like More

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