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.
Labcorp (LH)
Trailing 12-Month GAAP Operating Margin: 9.7%
With over 600 million tests performed annually and involvement in 90% of FDA-approved drugs in 2023, Labcorp (NYSE: LH) provides laboratory testing services and drug development solutions to doctors, hospitals, pharmaceutical companies, and patients worldwide.
Why Does LH Give Us Pause?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Expenses have increased as a percentage of revenue over the last five years as its adjusted operating margin fell by 12.3 percentage points
- Waning returns on capital imply its previous profit engines are losing steam
At $262.04 per share, Labcorp trades at 15x forward P/E. To fully understand why you should be careful with LH, check out our full research report (it’s free for active Edge members).
FirstCash (FCFS)
Trailing 12-Month GAAP Operating Margin: 15.1%
Offering a financial lifeline to the unbanked and credit-constrained since 1988, FirstCash (NASDAQ: FCFS) operates pawn stores across the U.S. and Latin America while also providing retail point-of-sale payment solutions for credit-constrained consumers.
Why Does FCFS Worry Us?
- Sales trends were unexciting over the last two years as its 6.9% annual growth was below the typical financials company
- Loan losses and capital returns have eroded its tangible book value per share this cycle as its tangible book value per share declined by 159% annually over the last five years
FirstCash’s stock price of $155.86 implies a valuation ratio of 16.1x forward P/E. Check out our free in-depth research report to learn more about why FCFS doesn’t pass our bar.
Walker & Dunlop (WD)
Trailing 12-Month GAAP Operating Margin: 12.1%
Originating as a small mortgage banking firm during the Great Depression in 1937, Walker & Dunlop (NYSE: WD) provides commercial real estate financing, property sales, appraisal, and investment management services with a focus on multifamily properties.
Why Do We Think Twice About WD?
- Annual net interest income declines of 43.8% for the past five years show its loan book struggled during this cycle
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 6.7% annually while its revenue grew
- Loan losses and capital returns have eroded its tangible book value per share this cycle as its tangible book value per share declined by 4.4% annually over the last five years
Walker & Dunlop is trading at $63.41 per share, or 1.2x forward P/B. If you’re considering WD for your portfolio, see our FREE research report to learn more.
Stocks We Like More
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