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".
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 avoid and some better opportunities instead.
Bright Horizons (BFAM)
Trailing 12-Month GAAP Operating Margin: 10.2%
Founded in 1986, Bright Horizons (NYSE: BFAM) is a global provider of child care, early education, and workforce support solutions.
Why Do We Think BFAM Will Underperform?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Estimated sales growth of 7.6% for the next 12 months implies demand will slow from its two-year trend
- Low returns on capital reflect management’s struggle to allocate funds effectively
Bright Horizons is trading at $118.04 per share, or 27.2x forward P/E. Dive into our free research report to see why there are better opportunities than BFAM.
Casella Waste Systems (CWST)
Trailing 12-Month GAAP Operating Margin: 3.8%
Starting with the founder picking up garbage with a pickup truck he purchased using savings from high school, Casella (NASDAQ: CWST) offers waste management services for businesses, residents, and the government.
Why Do We Think Twice About CWST?
- 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
- Expenses have increased as a percentage of revenue over the last five years as its operating margin fell by 4.7 percentage points
- ROIC of 6.1% reflects management’s challenges in identifying attractive investment opportunities, and its shrinking returns suggest its past profit sources are losing steam
Casella Waste Systems’s stock price of $98.63 implies a valuation ratio of 82.4x forward P/E. Read our free research report to see why you should think twice about including CWST in your portfolio.
SS&C (SSNC)
Trailing 12-Month GAAP Operating Margin: 22.9%
Founded in 1986 as a bridge between technology and financial services, SS&C Technologies (NASDAQ: SSNC) provides software and software-enabled services that help financial firms and healthcare organizations automate complex business processes.
Why Does SSNC Give Us Pause?
- Earnings per share lagged its peers over the last five years as they only grew by 7.1% annually
- Free cash flow margin shrank by 2.5 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
- Low returns on capital reflect management’s struggle to allocate funds effectively
At $87.50 per share, SS&C trades at 14.3x forward P/E. If you’re considering SSNC for your portfolio, see our FREE research report to learn more.
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