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.

Kimberly-Clark (KMB)

Trailing 12-Month GAAP Operating Margin: 16.2%

Originally founded as a Wisconsin paper mill in 1872, Kimberly-Clark (NYSE: KMB) is now a household products powerhouse known for personal care and tissue products.

Why Are We Cautious About KMB?

1. 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
2. Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 2%
3. 2.6 percentage point decline in its free cash flow margin over the last year reflects the company’s increased investments to defend its market position

At $120.82 per share, Kimberly-Clark trades at 15.8x forward P/E. Check out our free in-depth research report to learn more about why KMB doesn’t pass our bar.

Choice Hotels (CHH)

Trailing 12-Month GAAP Operating Margin: 30.2%

With almost 100% of its properties under franchise agreements, Choice Hotels (NYSE: CHH) is a hotel franchisor known for its diverse brand portfolio including Comfort Inn, Quality Inn, and Clarion.

Why Are We Out on CHH?

1. Revenue per room has disappointed over the past two years due to weaker trends in its daily rates and occupancy levels
2. Projected sales decline of 1.4% for the next 12 months points to a tough demand environment ahead
3. Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability

Choice Hotels’s stock price of $99.04 implies a valuation ratio of 13.9x forward P/E. Dive into our free research report to see why there are better opportunities than CHH.

Connection (CNXN)

Trailing 12-Month GAAP Operating Margin: 3.5%

Starting as a small computer products seller in 1982 and evolving into a Fortune 1000 company, Connection (NASDAQ: CNXN) is a technology solutions provider that helps businesses and government agencies design, purchase, implement, and manage their IT infrastructure and systems.

Why Should You Dump CNXN?

1. Annual sales declines of 1.3% for the past two years show its products and services struggled to connect with the market during this cycle
2. Earnings growth underperformed the sector average over the last two years as its EPS grew by just 6.1% annually
3. Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 2.3% for the last five years

Connection is trading at $62.20 per share, or 16.9x forward P/E. Read our free research report to see why you should think twice about including CNXN in your portfolio.

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