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 that don’t make the cut and some better opportunities instead.

Kadant (KAI)

Trailing 12-Month GAAP Operating Margin: 15.1%

Headquartered in Massachusetts, Kadant (NYSE: KAI) is a global supplier of high-value, critical components and engineered systems used in process industries worldwide.

Why Do We Think Twice About KAI?

1. Sales trends were unexciting over the last two years as its 3.8% annual growth was below the typical industrials company
2. Incremental sales over the last two years were much less profitable as its earnings per share fell by 3.6% annually while its revenue grew
3. Free cash flow margin dropped by 3.7 percentage points over the last five years, implying the company became more capital intensive as competition picked up

Kadant’s stock price of $293.74 implies a valuation ratio of 29.5x forward P/E. If you’re considering KAI for your portfolio, see our FREE research report to learn more.

Generac (GNRC)

Trailing 12-Month GAAP Operating Margin: 11.4%

With its name deriving from a combination of “generating” and “AC”, Generac (NYSE: GNRC) offers generators and other power products for residential, industrial, and commercial use.

Why Are We Wary of GNRC?

1. Annual revenue growth of 4.2% over the last two years was below our standards for the industrials sector
2. Day-to-day expenses have swelled relative to revenue over the last five years as its operating margin fell by 9.5 percentage points
3. Eroding returns on capital suggest its historical profit centers are aging

At $140.55 per share, Generac trades at 18.7x forward P/E. Read our free research report to see why you should think twice about including GNRC in your portfolio.

Hayward (HAYW)

Trailing 12-Month GAAP Operating Margin: 20.2%

Credited with introducing the first variable-speed pool pump, Hayward (NYSE: HAYW) makes residential and commercial pool equipment and accessories.

Why Is HAYW Not Exciting?

1. Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
2. Earnings per share have contracted by 26.9% annually over the last four years, a headwind for returns as stock prices often echo long-term EPS performance
3. Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions

Hayward is trading at $15.95 per share, or 19.4x forward P/E. To fully understand why you should be careful with HAYW, check out our full research report (it’s free for active Edge members).

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