Not all profitable companies are built to last - some rely on outdated models or unsustainable advantages.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.
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.
Huntington Ingalls (HII)
Trailing 12-Month GAAP Operating Margin: 5.3%
Building Nimitz-class aircraft carriers used in active service, Huntington Ingalls (NYSE: HII) develops marine vessels and their mission systems and maintenance services.
Why Do We Avoid HII?
- Annual sales growth of 5.8% over the last two years lagged behind its industrials peers as its large revenue base made it difficult to generate incremental demand
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 1.9% annually while its revenue grew
- Free cash flow margin dropped by 5.7 percentage points over the last five years, implying the company became more capital intensive as competition picked up
Huntington Ingalls is trading at $318.33 per share, or 17x forward P/E. Dive into our free research report to see why there are better opportunities than HII.
Encompass Health (EHC)
Trailing 12-Month GAAP Operating Margin: 18.2%
With a network of 161 specialized facilities across 37 states and Puerto Rico, Encompass Health (NYSE: EHC) operates inpatient rehabilitation hospitals that help patients recover from strokes, hip fractures, and other debilitating conditions.
Why Does EHC Fall Short?
- Annual revenue growth of 7.4% over the last five years was below our standards for the healthcare sector
- Weak comparable store sales trends over the past two years suggest there may be few opportunities in its core markets to open new facilities
- Expenses have increased as a percentage of revenue over the last five years as its adjusted operating margin fell by 3.5 percentage points
At $121.99 per share, Encompass Health trades at 19.4x forward P/E. If you’re considering EHC for your portfolio, see our FREE research report to learn more.
ExxonMobil (XOM)
Trailing 12-Month GAAP Operating Margin: 12.5%
One of the successor companies to John D. Rockefeller's Standard Oil monopoly that was broken up in 1911, ExxonMobil (NYSE: XOM) explores for and produces crude oil and natural gas, refines and sells petroleum products, and manufactures petrochemicals.
Why Do We Think Twice About XOM?
- Gross margin of 43.9% reflects its high production costs and unfavorable asset base
- Costs have risen faster than its revenue over the last five years, causing its EBITDA margin to decline by 1.3 percentage points
ExxonMobil’s stock price of $161.53 implies a valuation ratio of 13.3x forward P/E. To fully understand why you should be careful with XOM, check out our full research report (it’s free).
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