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.
Not all profitable companies are created equal, and that’s why we built StockStory - to help you find the ones that truly shine bright. That said, here are three profitable companies to steer clear of and a few better alternatives.
Skechers (SKX)
Trailing 12-Month GAAP Operating Margin: 9.5%
Synonymous with "dad shoe", Skechers (NYSE:SKX) is a footwear company renowned for its comfortable, stylish, and affordable shoes for all ages.
Why Are We Out on SKX?
- Underwhelming constant currency revenue performance over the past two years suggests its product offering at current prices doesn’t resonate with customers
- Estimated sales growth of 7.4% for the next 12 months implies demand will slow from its two-year trend
- Poor free cash flow margin of 4.4% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
At $63.30 per share, Skechers trades at 14.8x forward P/E. Check out our free in-depth research report to learn more about why SKX doesn’t pass our bar.
Packaging Corporation of America (PKG)
Trailing 12-Month GAAP Operating Margin: 13.9%
Founded in 1959, Packaging Corporation of America (NYSE: PKG) produces containerboard and corrugated packaging products as well as displays and package protection.
Why Is PKG Risky?
- Annual revenue growth of 1.4% over the last two years was below our standards for the industrials sector
- High input costs result in an inferior gross margin of 22.7% that must be offset through higher volumes
- Earnings per share have dipped by 4.2% annually over the past two years, which is concerning because stock prices follow EPS over the long term
Packaging Corporation of America’s stock price of $202.29 implies a valuation ratio of 12.4x forward EV-to-EBITDA. To fully understand why you should be careful with PKG, check out our full research report (it’s free).
Fidelity National Financial (FNF)
Trailing 12-Month GAAP Operating Margin: 11.6%
Issuing more title insurance policies than any other company in the United States, Fidelity National Financial (NYSE:FNF) provides title insurance and escrow services for real estate transactions while also offering annuities and life insurance through its F&G subsidiary.
Why Are We Cautious About FNF?
- Customers purchased fewer policies this cycle as its net premiums earned declined by 6.1% annually over the last four years
- Expenses have increased as a percentage of revenue over the last four years as its pre-tax profit margin fell by 9.9 percentage points
- Performance over the past two years shows its incremental sales were less profitable, as its 1.2% annual earnings per share growth trailed its revenue gains
Fidelity National Financial is trading at $57.99 per share, or 1.7x forward P/B. Dive into our free research report to see why there are better opportunities than FNF.
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