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".

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.

Watsco (WSO)

Trailing 12-Month GAAP Operating Margin: 10.2%

Originally a manufacturing company, Watsco (NYSE: WSO) today only distributes air conditioning, heating, and refrigeration equipment, as well as related parts and supplies.

Why Are We Out on WSO?

1. Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and in-store experience
2. Performance over the past two years shows its incremental sales were much less profitable, as its earnings per share fell by 4.2% annually
3. Waning returns on capital imply its previous profit engines are losing steam

Watsco is trading at $351.13 per share, or 26.6x forward P/E. Read our free research report to see why you should think twice about including WSO in your portfolio.

Fortive (FTV)

Trailing 12-Month GAAP Operating Margin: 17.2%

Taking its name from the Latin root of "strong", Fortive (NYSE: FTV) manufactures products and develops industrial software for numerous industries.

Why Should You Sell FTV?

1. 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
2. Earnings per share were flat over the last five years and fell short of the peer group average
3. Low returns on capital reflect management’s struggle to allocate funds effectively, and its decreasing returns suggest its historical profit centers are aging

Fortive’s stock price of $50.90 implies a valuation ratio of 17.9x forward P/E. If you’re considering FTV for your portfolio, see our FREE research report to learn more.

L.B. Foster (FSTR)

Trailing 12-Month GAAP Operating Margin: 3.7%

Founded with a $2,500 loan, L.B. Foster (NASDAQ: FSTR) is a provider of products and services for the transportation and energy infrastructure sectors, including rail products, construction materials, and coating solutions.

Why Does FSTR Fall Short?

1. Products and services are facing end-market challenges during this cycle, as seen in its flat sales over the last five years
2. Earnings per share fell by 31.4% annually over the last five years while its revenue was flat, partly because it diluted shareholders
3. Below-average returns on capital indicate management struggled to find compelling investment opportunities

At $27.30 per share, L.B. Foster trades at 6.4x forward EV-to-EBITDA. To fully understand why you should be careful with FSTR, check out our full research report (it’s free for active Edge members).

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