Not all profitable companies are built to last - some rely on outdated models or unsustainable advantages.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.
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.
Kohl's (KSS)
Trailing 12-Month GAAP Operating Margin: 3.4%
Founded as a corner grocery store in Milwaukee, Wisconsin, Kohl’s (NYSE:KSS) is a department store chain that sells clothing, cosmetics, electronics, and home goods.
Why Do We Steer Clear of KSS?
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its brick-and-mortar locations
- Earnings per share have dipped by 29.6% annually over the past three years, which is concerning because stock prices follow EPS over the long term
- 6× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
Kohl's is trading at $17.55 per share, or 14.7x forward P/E. If you’re considering KSS for your portfolio, see our FREE research report to learn more.
First Watch (FWRG)
Trailing 12-Month GAAP Operating Margin: 1.9%
Based on a nautical reference to the first work shift aboard a ship, First Watch (NASDAQ:FWRG) is a chain of breakfast and brunch restaurants whose menu is heavily-focused on eggs and griddle items such as pancakes.
Why Does FWRG Worry Us?
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new restaurants
- Increased cash burn over the last year raises questions about the return timeline for its investments
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
First Watch’s stock price of $17.42 implies a valuation ratio of 58.6x forward P/E. To fully understand why you should be careful with FWRG, check out our full research report (it’s free).
Packaging Corporation of America (PKG)
Trailing 12-Month GAAP Operating Margin: 12.3%
Founded in 1959, Packaging Corporation of America (NYSE: PKG) produces containerboard and corrugated packaging products as well as displays and package protection.
Why Are We Cautious About PKG?
- Disappointing unit sales over the past two years indicate demand is soft and that the company may need to revise its strategy
- Efficiency has decreased over the last five years as its operating margin fell by 3.7 percentage points
- Waning returns on capital imply its previous profit engines are losing steam
At $238.06 per share, Packaging Corporation of America trades at 22.1x forward P/E. Read our free research report to see why you should think twice about including PKG in your portfolio.
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