Not all profitable companies are built to last - some rely on outdated models or unsustainable advantages.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 steer clear of and a few better alternatives.
Skyworks Solutions (SWKS)
Trailing 12-Month GAAP Operating Margin: 11.2%
Result of a merger of Alpha Industries and the wireless communications division of Conexant, Skyworks Solutions (NASDAQ: SWKS) is a designer and manufacturer of chips used in smartphones, autos, and industrial applications to amplify, filter, and process wireless signals.
Why Do We Pass on SWKS?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 10.1% annually over the last two years
- Projected sales decline of 8% over the next 12 months indicates demand will continue deteriorating
- Efficiency has decreased over the last five years as its operating margin fell by 21.5 percentage points
At $68.18 per share, Skyworks Solutions trades at 17x forward P/E. Read our free research report to see why you should think twice about including SWKS in your portfolio.
Trex (TREX)
Trailing 12-Month GAAP Operating Margin: 22.5%
Addressing the demand for aesthetically-pleasing and unique outdoor living spaces, Trex Company (NYSE: TREX) makes wood-alternative decking, railing, and patio furniture.
Why Does TREX Worry Us?
- Day-to-day expenses have swelled relative to revenue over the last five years as its operating margin fell by 3.3 percentage points
- 5.4 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
- Diminishing returns on capital suggest its earlier profit pools are drying up
Trex is trading at $61.77 per share, or 25.5x forward P/E. Dive into our free research report to see why there are better opportunities than TREX.
MSC Industrial (MSM)
Trailing 12-Month GAAP Operating Margin: 8.2%
Founded in NYC’s Little Italy, MSC Industrial Direct (NYSE: MSM) provides industrial supplies and equipment, offering vast and reliable selection for customers such as contractors
Why Do We Avoid MSM?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 3.5%
- Earnings per share fell by 5.6% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
MSC Industrial’s stock price of $87.27 implies a valuation ratio of 22.5x forward P/E. If you’re considering MSM for your portfolio, see our FREE research report to learn more.
Stocks We Like More
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