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.
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 to avoid and some better opportunities instead.
F5 (FFIV)
Trailing 12-Month GAAP Operating Margin: 24.8%
Originally named after the F5 tornado, the most powerful on the meteorological scale, F5 (NASDAQ: FFIV) provides security and delivery solutions that protect applications across cloud, data center, and edge environments for large organizations.
Why Are We Wary of FFIV?
- ARR has averaged 9.4% declines over the last year, suggesting that competition is pulling attention away from its software
- Anticipated sales growth of 4.5% for the next year implies demand will be shaky
- Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 2.8 percentage points
F5 is trading at $312 per share, or 5.8x forward price-to-sales. Read our free research report to see why you should think twice about including FFIV in your portfolio.
Karat Packaging (KRT)
Trailing 12-Month GAAP Operating Margin: 9.7%
Founded as Lollicup, Karat Packaging (NASDAQ: KRT) distributes and manufactures environmentally-friendly disposable foodservice packaging solutions.
Why Does KRT Give Us Pause?
- 4.2% annual revenue growth over the last two years was slower than its industrials peers
- Revenue growth over the past two years was nullified by the company’s new share issuances as its earnings per share fell by 2.9% annually
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 5.9% for the last five years
At $25.27 per share, Karat Packaging trades at 17.1x forward P/E. Check out our free in-depth research report to learn more about why KRT doesn’t pass our bar.
Caterpillar (CAT)
Trailing 12-Month GAAP Operating Margin: 18.2%
With its iconic yellow machinery working on construction sites, Caterpillar (NYSE: CAT) manufactures construction equipment like bulldozers, excavators, and parts and maintenance services.
Why Do We Think Twice About CAT?
- Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
- Projected sales growth of 5% for the next 12 months suggests sluggish demand
- Earnings growth underperformed the sector average over the last two years as its EPS grew by just 2.7% annually
Caterpillar’s stock price of $419.60 implies a valuation ratio of 21.1x forward P/E. If you’re considering CAT for your portfolio, see our FREE research report to learn more.
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