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".
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 steer clear of and a few better alternatives.
Mattel (MAT)
Trailing 12-Month GAAP Operating Margin: 13.8%
Known for the creation of iconic toys such as Barbie and Hotwheels, Mattel (NASDAQ: MAT) is a global children's entertainment company specializing in the design and production of consumer products.
Why Does MAT Fall Short?
- Sales trends were unexciting over the last two years as its 2.7% annual growth was below the typical consumer discretionary company
- Estimated sales growth of 2.5% for the next 12 months is soft and implies weaker demand
- Diminishing returns on capital suggest its earlier profit pools are drying up
Mattel is trading at $18.55 per share, or 11.4x forward P/E. Dive into our free research report to see why there are better opportunities than MAT.
ABM (ABM)
Trailing 12-Month GAAP Operating Margin: 2.5%
With roots dating back to 1909 as a window washing company, ABM Industries (NYSE: ABM) provides integrated facility management, infrastructure, and mobility solutions across various sectors including commercial, manufacturing, education, and aviation.
Why Do We Avoid ABM?
- Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
- Incremental sales over the last two years were less profitable as its earnings per share were flat while its revenue grew
- Free cash flow margin shrank by 8.3 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
At $48.89 per share, ABM trades at 12.6x forward P/E. If you’re considering ABM for your portfolio, see our FREE research report to learn more.
Brookdale (BKD)
Trailing 12-Month GAAP Operating Margin: 1.9%
With a network of over 650 communities serving approximately 59,000 residents across 41 states, Brookdale Senior Living (NYSE: BKD) operates senior living communities across the United States, offering independent living, assisted living, memory care, and continuing care retirement communities.
Why Are We Hesitant About BKD?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 3.8% annually over the last five years
- Low returns on capital reflect management’s struggle to allocate funds effectively
Brookdale’s stock price of $7.73 implies a valuation ratio of 4x forward EV-to-EBITDA. To fully understand why you should be careful with BKD, check out our full research report (it’s free).
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