Even if a company is profitable, it doesn’t always mean it’s a great investment. Some struggle to maintain growth, face looming threats, or fail to reinvest wisely, limiting their future potential.
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 avoid and some better opportunities instead.
Denny's (DENN)
Trailing 12-Month GAAP Operating Margin: 8.8%
Open around the clock, Denny’s (NASDAQ: DENN) is a chain of diner restaurants serving breakfast and traditional American fare.
Why Do We Steer Clear of DENN?
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new restaurants
- Free cash flow margin dropped by 8.7 percentage points over the last year, implying the company became more capital intensive as competition picked up
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
At $3.79 per share, Denny's trades at 7.6x forward P/E. If you’re considering DENN for your portfolio, see our FREE research report to learn more.
Harley-Davidson (HOG)
Trailing 12-Month GAAP Operating Margin: 4.1%
Founded in 1903, Harley-Davidson (NYSE: HOG) is an American motorcycle manufacturer known for its heavyweight motorcycles designed for cruising on highways.
Why Are We Hesitant About HOG?
- Performance surrounding its motorcycles sold has lagged its peers
- Eroding returns on capital suggest its historical profit centers are aging
- 19× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
Harley-Davidson is trading at $25.59 per share, or 9x forward P/E. To fully understand why you should be careful with HOG, check out our full research report (it’s free).
Essent Group (ESNT)
Trailing 12-Month GAAP Operating Margin: 66.3%
Serving as a crucial bridge between homebuyers and the American dream of homeownership, Essent Group (NYSE: ESNT) provides private mortgage insurance and title services that enable lenders to offer home loans with down payments of less than 20%.
Why Is ESNT Not Exciting?
- Sluggish 3.6% annualized growth in net premiums earned over the last five years indicates the firm trailed its insurance peers
- Costs have risen faster than its revenue over the last two years, causing its pre-tax profit margin to decline by 12.5 percentage points
- Incremental sales over the last two years were less profitable as its 4.9% annual earnings per share growth lagged its revenue gains
Essent Group’s stock price of $62.03 implies a valuation ratio of 1x forward P/B. Dive into our free research report to see why there are better opportunities than ESNT.
Stocks We Like More
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