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 that don’t make the cut and some better opportunities instead.
Keysight (KEYS)
Trailing 12-Month GAAP Operating Margin: 16.3%
Spun off from Hewlett-Packard in 2014, Keysight (NYSE:KEYS) offers electronic measurement products for use in various sectors.
Why Does KEYS Give Us Pause?
- New orders were hard to come by as its average backlog growth of 1.1% over the past two years underwhelmed
- Earnings per share fell by 7.3% annually over the last two years while its revenue was flat, showing each sale was less profitable
- Diminishing returns on capital suggest its earlier profit pools are drying up
Keysight is trading at $209.64 per share, or 25.9x forward P/E. To fully understand why you should be careful with KEYS, check out our full research report (it’s free).
TopBuild (BLD)
Trailing 12-Month GAAP Operating Margin: 15.8%
Established in 2015 following a spinoff from Masco Corporation, TopBuild (NYSE:BLD) is a distributor and installer of insulation and other building products.
Why Are We Wary of BLD?
- Products and services are facing end-market challenges during this cycle, as seen in its flat sales over the last two years
- Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
- Earnings per share lagged its peers over the last two years as they only grew by 2.5% annually
TopBuild’s stock price of $486.11 implies a valuation ratio of 24x forward P/E. Read our free research report to see why you should think twice about including BLD in your portfolio.
Encore Capital Group (ECPG)
Trailing 12-Month GAAP Operating Margin: 20.4%
Operating in the often misunderstood world of debt collection since 1999, Encore Capital Group (NASDAQ:ECPG) purchases portfolios of defaulted consumer debt at deep discounts and works with individuals to recover these obligations while helping them toward financial recovery.
Why Do We Think Twice About ECPG?
- 1.3% annual revenue growth over the last five years was slower than its financials peers
- Earnings per share fell by 15.9% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
- 11× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
At $55.02 per share, Encore Capital Group trades at 7.6x forward P/E. Check out our free in-depth research report to learn more about why ECPG doesn’t pass our bar.
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