Not all profitable companies are built to last - some rely on outdated models or unsustainable advantages.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

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.

TreeHouse Foods (THS)

Trailing 12-Month GAAP Operating Margin: 3.1%

Whether it be packaged crackers, broths, or beverages, Treehouse Foods (NYSE: THS) produces a wide range of private-label foods for grocery and food service customers.

Why Do We Avoid THS?

1. Shrinking unit sales over the past two years show it’s struggled to move its products and had to rely on price increases
2. Gross margin of 16.5% is below its competitors, leaving less money to invest in areas like marketing and production facilities
3. ROIC of 1.4% reflects management’s challenges in identifying attractive investment opportunities

At $20.44 per share, TreeHouse Foods trades at 10.6x forward P/E. Dive into our free research report to see why there are better opportunities than THS.

Frontdoor (FTDR)

Trailing 12-Month GAAP Operating Margin: 18.2%

Established in 2018 as a spin-off from ServiceMaster Global Holdings, Frontdoor (NASDAQ: FTDR) is a provider of home warranty and service plans.

Why Does FTDR Give Us Pause?

1. Sluggish trends in its home service plans suggest customers aren’t adopting its solutions as quickly as the company hoped
2. Free cash flow margin is forecasted to shrink by 2.4 percentage points in the coming year, suggesting the company will consume more capital to keep up with its competitors
3. Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability

Frontdoor is trading at $57.99 per share, or 18.9x forward P/E. To fully understand why you should be careful with FTDR, check out our full research report (it’s free).

Interface (TILE)

Trailing 12-Month GAAP Operating Margin: 10.1%

Pioneering carbon-neutral flooring since its founding in 1973, Interface (NASDAQ: TILE) is a global manufacturer of modular carpet tiles, luxury vinyl tile (LVT), and rubber flooring that specializes in carbon-neutral and sustainable flooring solutions.

Why Do We Think TILE Will Underperform?

1. Products and services are facing end-market challenges during this cycle, as seen in its flat sales over the last five years
2. Performance over the past five years shows each sale was less profitable, as its earnings per share fell by 3.5% annually
3. Below-average returns on capital indicate management struggled to find compelling investment opportunities

Interface’s stock price of $20.07 implies a valuation ratio of 7.3x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including TILE in your portfolio.

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