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.

Not all profitable companies are created equal, and that’s why we built StockStory - to help you find the ones that truly shine bright. Keeping that in mind, here are three profitable companies to steer clear of and a few better alternatives.

Texas Instruments (TXN)

Trailing 12-Month GAAP Operating Margin: 34.3%

Headquartered in Dallas, Texas since the 1950s, Texas Instruments (NASDAQ: TXN) is the world’s largest producer of analog semiconductors.

Why Are We Hesitant About TXN?

1. Sales tumbled by 2.4% annually over the last two years, showing market trends are working against its favor during this cycle
2. Efficiency has decreased over the last five years as its operating margin fell by 13.5 percentage points
3. 28.5 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

Texas Instruments is trading at $173.82 per share, or 30x forward P/E. Read our free research report to see why you should think twice about including TXN in your portfolio.

Pegasystems (PEGA)

Trailing 12-Month GAAP Operating Margin: 17.4%

With a "Center-out Business Architecture" approach that transcends organizational silos, Pegasystems (NASDAQ: PEGA) develops software that helps organizations automate workflows and use artificial intelligence to improve customer experiences and business processes.

Why Does PEGA Worry Us?

1. Sales trends were unexciting over the last five years as its 11.7% annual growth was below the typical software company
2. Estimated sales growth of 4.2% for the next 12 months implies demand will slow from its two-year trend
3. Customer acquisition costs take a while to recoup, making it difficult to justify sales and marketing investments that could increase revenue

At $59.73 per share, Pegasystems trades at 6.3x forward price-to-sales. To fully understand why you should be careful with PEGA, check out our full research report (it’s free for active Edge members).

TEGNA (TGNA)

Trailing 12-Month GAAP Operating Margin: 20.8%

Spun out of Gannett in 2015, TEGNA (NYSE: TGNA) is a media company operating a network of television stations and digital platforms, focusing on local news and community content.

Why Are We Out on TGNA?

1. Muted 1.3% annual revenue growth over the last five years shows its demand lagged behind its consumer discretionary peers
2. Earnings growth underperformed the sector average over the last five years as its EPS grew by just 7.9% annually
3. Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value

TEGNA’s stock price of $19.41 implies a valuation ratio of 8.4x forward P/E. Check out our free in-depth research report to learn more about why TGNA doesn’t pass our bar.

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