Not all profitable companies are built to last - some rely on outdated models or unsustainable advantages. Just because a business is in the green today doesn’t mean it will thrive tomorrow.
A business making money today isn’t necessarily a winner, which is why we analyze companies across multiple dimensions at StockStory. Keeping that in mind, here are three profitable companies to avoid and some better opportunities instead.
Zoom (ZM)
Trailing 12-Month GAAP Operating Margin: 24.2%
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 Are We Bearish on ZM?
- Customers had second thoughts about committing to its platform over the last year as its average billings growth of 4.8% underwhelmed
- Net revenue retention rate of 98.3% shows it has a tough time retaining customers
- Estimated sales growth of 4.2% for the next 12 months is soft and implies weaker demand
Zoom is trading at $98.50 per share, or 5.6x forward price-to-sales. To fully understand why you should be careful with ZM, check out our full research report (it’s free).
MasterCraft (MCFT)
Trailing 12-Month GAAP Operating Margin: 3.7%
Started by a waterskiing instructor, MasterCraft (NASDAQ: MCFT) specializes in designing, manufacturing, and selling sport boats.
Why Is MCFT Risky?
- Sales tumbled by 6.7% annually over the last five years, showing consumer trends are working against it
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 7% for the last two years
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
MasterCraft’s stock price of $24.04 implies a valuation ratio of 13.1x forward P/E. Check out our free in-depth research report to learn more about why MCFT doesn’t pass our bar.
Silgan Holdings (SLGN)
Trailing 12-Month GAAP Operating Margin: 8.6%
Established in 1987, Silgan Holdings (NYSE: SLGN) is a supplier of rigid packaging for consumer goods products, specializing in metal containers, closures, and plastic packaging.
Why Should You Sell SLGN?
- Muted 4.7% annual revenue growth over the last five years shows its demand lagged behind its industrials peers
- High input costs result in an inferior gross margin of 16.8% that must be offset through higher volumes
- 6× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
At $41.39 per share, Silgan Holdings trades at 10.3x forward P/E. If you’re considering SLGN for your portfolio, see our FREE research report to learn more.
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