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. Keeping that in mind, here are three profitable companies to steer clear of and a few better alternatives.
Hormel Foods (HRL)
Trailing 12-Month GAAP Operating Margin: 5.8%
Best known for its SPAM brand, Hormel (NYSE: HRL) is a packaged foods company with products that span meat, poultry, shelf-stable foods, and spreads.
Why Do We Think HRL Will Underperform?
- Declining unit sales over the past two years indicate demand is soft and that the company may need to revise its product strategy
- Commoditized products, bad unit economics, and high competition are reflected in its low gross margin of 16.2%
- Sales over the last three years were less profitable as its earnings per share fell by 6.2% annually while its revenue was flat
Hormel Foods’s stock price of $25.78 implies a valuation ratio of 16.7x forward P/E. To fully understand why you should be careful with HRL, check out our full research report (it’s free).
Haemonetics (HAE)
Trailing 12-Month GAAP Operating Margin: 11.7%
With roots dating back to 1971 and a mission to improve blood-related healthcare, Haemonetics (NYSE: HAE) provides specialized medical devices and software for blood collection, processing, and management across plasma centers, blood banks, and hospitals.
Why Do We Think Twice About HAE?
- Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
- Smaller revenue base of $1.33 billion means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
Haemonetics is trading at $78 per share, or 14x forward P/E. If you’re considering HAE for your portfolio, see our FREE research report to learn more.
Waste Connections (WCN)
Trailing 12-Month GAAP Operating Margin: 17.5%
Operating a network of municipal solid waste landfills in the U.S. and Canada, Waste Connections (NYSE: WCN) is North America's third-largest waste management company providing collection, disposal, and recycling services.
Why Does WCN Worry Us?
- Estimated sales growth of 5.5% for the next 12 months implies demand will slow from its two-year trend
- Free cash flow margin dropped by 2.6 percentage points over the last five years, implying the company became more capital intensive as competition picked up
- ROIC of 6.6% reflects management’s challenges in identifying attractive investment opportunities, and its falling returns suggest its earlier profit pools are drying up
At $166.23 per share, Waste Connections trades at 29.6x forward P/E. Check out our free in-depth research report to learn more about why WCN doesn’t pass our bar.
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