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. Keeping that in mind, here are three profitable companies to steer clear of and a few better alternatives.
Boot Barn (BOOT)
Trailing 12-Month GAAP Operating Margin: 13.3%
With a strong store presence in Texas, California, Florida, and Oklahoma, Boot Barn (NYSE:BOOT) is a western-inspired apparel and footwear retailer.
Why Are We Hesitant About BOOT?
- Sales trends were unexciting over the last three years as its 9.3% annual growth was below the typical consumer retail company
- Subscale operations are evident in its revenue base of $2.07 billion, meaning it has fewer distribution channels than its larger rivals
- Gross margin of 37.5% is below its competitors, leaving less money for marketing and promotions
Boot Barn is trading at $187.09 per share, or 26.1x forward P/E. Dive into our free research report to see why there are better opportunities than BOOT.
LGI Homes (LGIH)
Trailing 12-Month GAAP Operating Margin: 6%
Based in Texas, LGI Homes (NASDAQ:LGIH) is a homebuilding company specializing in constructing affordable, entry-level single-family homes in desirable communities across the United States.
Why Do We Think LGIH Will Underperform?
- Backlog has dropped by 10.3% on average over the past two years, suggesting it’s losing orders as competition picks up
- Diminishing returns on capital suggest its earlier profit pools are drying up
- Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders
LGI Homes’s stock price of $53.69 implies a valuation ratio of 14x forward P/E. If you’re considering LGIH for your portfolio, see our FREE research report to learn more.
Clear Channel Outdoor (CCO)
Trailing 12-Month GAAP Operating Margin: 19.3%
With thousands of digital and traditional displays lighting up America's highways, city streets, and airports, Clear Channel Outdoor (NYSE:CCO) operates billboards, street furniture, and airport displays, connecting advertisers with millions of consumers across the US.
Why Does CCO Worry Us?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 5.3% annually over the last five years
- Negative free cash flow raises questions about the return timeline for its investments
- 13× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
At $1.99 per share, Clear Channel Outdoor trades at 14.2x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why CCO doesn’t pass our bar.
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