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 steer clear of and a few better alternatives.
Mister Car Wash (MCW)
Trailing 12-Month GAAP Operating Margin: 18.6%
Formerly known as Hotshine Holdings, Mister Car Wash (NYSE: MCW) offers car washes across the United States through its conveyorized service.
Why Do We Steer Clear of MCW?
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its stores
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
- Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution
At $6.45 per share, Mister Car Wash trades at 14.2x forward P/E. Read our free research report to see why you should think twice about including MCW in your portfolio.
Chemed (CHE)
Trailing 12-Month GAAP Operating Margin: 15.6%
With a unique business model combining end-of-life care and household services, Chemed (NYSE: CHE) operates two distinct businesses: VITAS, which provides hospice care for terminally ill patients, and Roto-Rooter, which offers plumbing and water restoration services.
Why Does CHE Fall Short?
- Sales trends were unexciting over the last five years as its 4.6% annual growth was below the typical healthcare company
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 8.9 percentage points
- Eroding returns on capital suggest its historical profit centers are aging
Chemed’s stock price of $473.18 implies a valuation ratio of 18.3x forward P/E. Check out our free in-depth research report to learn more about why CHE doesn’t pass our bar.
SS&C (SSNC)
Trailing 12-Month GAAP Operating Margin: 23%
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 Are We Cautious About SSNC?
- Annual revenue growth of 4.9% over the last five years was below our standards for the business services sector
- Free cash flow margin shrank by 3 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
SS&C is trading at $82.14 per share, or 13.8x forward P/E. To fully understand why you should be careful with SSNC, check out our full research report (it’s free).
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