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 steer clear of and a few better alternatives.
Vulcan Materials (VMC)
Trailing 12-Month GAAP Operating Margin: 18.9%
Founded in 1909, Vulcan Materials (NYSE:VMC) is a producer of construction aggregates, primarily crushed stone, sand, and gravel.
Why Are We Wary of VMC?
- Sales stagnated over the last two years and signal the need for new growth strategies
- Sluggish trends in its tons shipped suggest customers aren’t adopting its solutions as quickly as the company hoped
- Gross margin of 25% is below its competitors, leaving less money to invest in areas like marketing and R&D
Vulcan Materials’s stock price of $300.81 implies a valuation ratio of 33.9x forward P/E. Read our free research report to see why you should think twice about including VMC in your portfolio.
Universal Health Services (UHS)
Trailing 12-Month GAAP Operating Margin: 11%
With a network spanning 39 states and three countries, Universal Health Services (NYSE:UHS) operates acute care hospitals and behavioral health facilities across the United States, United Kingdom, and Puerto Rico.
Why Do We Think Twice About UHS?
- Lagging comparable store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Day-to-day expenses have swelled relative to revenue over the last five years as its adjusted operating margin fell by 1.3 percentage points
- Low free cash flow margin of 4.1% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
Universal Health Services is trading at $190.79 per share, or 9.4x forward P/E. If you’re considering UHS for your portfolio, see our FREE research report to learn more.
Cisco (CSCO)
Trailing 12-Month GAAP Operating Margin: 21.4%
Founded in 1984 by a husband and wife team who wanted computers at Stanford to talk to computers at UC Berkeley, Cisco (NASDAQ:CSCO) designs and sells networking equipment, security solutions, and collaboration tools that help businesses connect their systems and secure their digital operations.
Why Does CSCO Fall Short?
- Sales were flat over the last two years, indicating it’s failed to expand this cycle
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 6.2 percentage points
- Waning returns on capital imply its previous profit engines are losing steam
At $67.25 per share, Cisco trades at 16.9x forward P/E. To fully understand why you should be careful with CSCO, check out our full research report (it’s free).
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