Not all profitable companies are built to last - some rely on outdated models or unsustainable advantages.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.
Profits are valuable, but they’re not everything. At StockStory, we help you identify the companies that have real staying power. Keeping that in mind, here are three profitable companies that don’t make the cut and some better opportunities instead.
Lancaster Colony (LANC)
Trailing 12-Month GAAP Operating Margin: 11.8%
Known for its frozen garlic bread and Parkerhouse rolls, Lancaster Colony (NASDAQ: LANC) sells bread, dressing, and dips to the retail and food service channels.
Why Are We Cautious About LANC?
- Lackluster 5.4% annual revenue growth over the last three years indicates the company is losing ground to competitors
- Modest revenue base of $1.89 billion gives it less fixed cost leverage and fewer distribution channels than larger companies
- Gross margin of 23.3% is an output of its commoditized products
At $172.87 per share, Lancaster Colony trades at 24.4x forward P/E. If you’re considering LANC for your portfolio, see our FREE research report to learn more.
Enphase (ENPH)
Trailing 12-Month GAAP Operating Margin: 11.7%
The first company to successfully commercialize the solar micro-inverter, Enphase (NASDAQ: ENPH) manufactures software-driven home energy products.
Why Are We Hesitant About ENPH?
- Declining unit sales over the past two years suggest it might have to lower prices to accelerate growth
- Day-to-day expenses have swelled relative to revenue over the last five years as its operating margin fell by 12 percentage points
- Earnings per share have contracted by 27.3% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance
Enphase is trading at $31.51 per share, or 12.6x forward P/E. Check out our free in-depth research report to learn more about why ENPH doesn’t pass our bar.
HP (HPQ)
Trailing 12-Month GAAP Operating Margin: 6.3%
Born from the legendary Silicon Valley garage startup founded by Bill Hewlett and Dave Packard in 1939, HP (NYSE: HPQ) designs and sells personal computers, printers, and related technology products and services to consumers, businesses, and enterprises worldwide.
Why Do We Pass on HPQ?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 1% annually over the last five years
- Earnings per share decreased by more than its revenue over the last two years, showing each sale was less profitable
- Free cash flow margin dropped by 4.1 percentage points over the last five years, implying the company became more capital intensive as competition picked up
HP’s stock price of $24.60 implies a valuation ratio of 6.8x forward P/E. Dive into our free research report to see why there are better opportunities than HPQ.
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