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. That said, here are three profitable companies to avoid and some better opportunities instead.
Bath and Body Works (BBWI)
Trailing 12-Month GAAP Operating Margin: 17.1%
Spun off from L Brands in 2020, Bath & Body Works (NYSE: BBWI) is a personal care and home fragrance retailer where consumers can find specialty shower gels, scented candles for the home, and lotions.
Why Does BBWI Give Us Pause?
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its brick-and-mortar locations
- Estimated sales growth of 2.1% for the next 12 months implies demand will slow from its six-year trend
- Earnings growth underperformed the sector average over the last six years as its EPS grew by just 8.5% annually
Bath and Body Works’s stock price of $23.87 implies a valuation ratio of 6.7x forward P/E. Check out our free in-depth research report to learn more about why BBWI doesn’t pass our bar.
Hilton Grand Vacations (HGV)
Trailing 12-Month GAAP Operating Margin: 8.5%
Spun off from Hilton Worldwide in 2017, Hilton Grand Vacations (NYSE: HGV) is a global timeshare company that provides travel experiences for its customers through its timeshare resorts and club membership programs.
Why Are We Wary of HGV?
- Muted 12.5% annual revenue growth over the last two years shows its demand lagged behind its consumer discretionary peers
- ROIC of 4.6% reflects management’s challenges in identifying attractive investment opportunities, and its falling returns suggest its earlier profit pools are drying up
- High net-debt-to-EBITDA ratio of 11× could force the company to raise capital at unfavorable terms if market conditions deteriorate
At $41.62 per share, Hilton Grand Vacations trades at 9.7x forward P/E. To fully understand why you should be careful with HGV, check out our full research report (it’s free for active Edge members).
Expeditors (EXPD)
Trailing 12-Month GAAP Operating Margin: 9.9%
Expeditors (NYSE: EXPD) offers air and ocean freight as well as brokerage services.
Why Does EXPD Fall Short?
- Annual sales growth of 3.3% over the last two years lagged behind its industrials peers as its large revenue base made it difficult to generate incremental demand
- Gross margin of 13.4% is below its competitors, leaving less money to invest in areas like marketing and R&D
- Waning returns on capital imply its previous profit engines are losing steam
Expeditors is trading at $139.59 per share, or 24.5x forward P/E. Read our free research report to see why you should think twice about including EXPD in your portfolio.
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