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. Keeping that in mind, here are three profitable companies to avoid and some better opportunities instead.
Zoom (ZM)
Trailing 12-Month GAAP Operating Margin: 22.9%
Once the verb that defined remote work during the pandemic ("let's Zoom later"), Zoom (NASDAQ: ZM) provides a cloud-based platform for video meetings, phone calls, team chat, and collaboration tools that helps businesses and individuals connect virtually.
Why Should You Dump ZM?
- Products, pricing, or go-to-market strategy may need some adjustments as its 3.9% average billings growth over the last year was weak
- Net revenue retention rate of 98% shows it has a tough time retaining customers
- Anticipated sales growth of 3.6% for the next year implies demand will be shaky
At $88.98 per share, Zoom trades at 5.6x forward price-to-sales. If you’re considering ZM for your portfolio, see our FREE research report to learn more.
McCormick (MKC)
Trailing 12-Month GAAP Operating Margin: 15.7%
The classic red Heinz ketchup bottle’s competitor, McCormick (NYSE: MKC) sells food-flavoring products like condiments, spices, and seasoning mixes.
Why Are We Cautious About MKC?
- Muted 2.5% annual revenue growth over the last three years shows its demand lagged behind its consumer staples peers
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
McCormick’s stock price of $66.98 implies a valuation ratio of 21.5x forward P/E. Read our free research report to see why you should think twice about including MKC in your portfolio.
Boise Cascade (BCC)
Trailing 12-Month GAAP Operating Margin: 4%
Formed through the merger of two lumber companies, Boise Cascade Company (NYSE: BCC) manufactures and distributes wood products and other building materials.
Why Are We Out on BCC?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 2.3% annually over the last two years
- Free cash flow margin dropped by 6.8 percentage points over the last five years, implying the company became more capital intensive as competition picked up
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
Boise Cascade is trading at $88.87 per share, or 28.1x forward P/E. Dive into our free research report to see why there are better opportunities than BCC.
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