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.
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.
The Cheesecake Factory (CAKE)
Trailing 12-Month GAAP Operating Margin: 5.4%
Celebrated for its delicious (and free) brown bread, gigantic portions, and delectable desserts, Cheesecake Factory (NASDAQ: CAKE) is an iconic American restaurant chain that also owns and operates a portfolio of separate restaurant brands.
Why Are We Cautious About CAKE?
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new restaurants
- Responsiveness to unforeseen market trends is restricted due to its substandard operating margin profitability
- 6× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
The Cheesecake Factory is trading at $54.99 per share, or 13.9x forward P/E. Read our free research report to see why you should think twice about including CAKE in your portfolio.
Fastenal (FAST)
Trailing 12-Month GAAP Operating Margin: 20.1%
Founded in 1967, Fastenal (NASDAQ: FAST) provides industrial and construction supplies, including fasteners, tools, safety products, and many other product categories to businesses globally.
Why Is FAST Not Exciting?
- Sales trends were unexciting over the last two years as its 3.6% annual growth was below the typical industrials company
- Earnings per share lagged its peers over the last two years as they only grew by 2.8% annually
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 4.8 percentage points
At $47.88 per share, Fastenal trades at 44.2x forward P/E. If you’re considering FAST for your portfolio, see our FREE research report to learn more.
Maximus (MMS)
Trailing 12-Month GAAP Operating Margin: 9.6%
With nearly 50 years of experience translating public policy into operational programs that serve millions of citizens, Maximus (NYSE: MMS) provides operational services, clinical assessments, and technology solutions to government agencies in the U.S. and internationally.
Why Do We Think Twice About MMS?
- Estimated sales growth of 1.9% for the next 12 months implies demand will slow from its two-year trend
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 11.3 percentage points
- ROIC of 12.3% reflects management’s challenges in identifying attractive investment opportunities
Maximus’s stock price of $88.98 implies a valuation ratio of 13.6x forward P/E. Dive into our free research report to see why there are better opportunities than MMS.
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