Even if a company is profitable, it doesn’t always mean it’s a great investment. Some struggle to maintain growth, face looming threats, or fail to reinvest wisely, limiting their future potential.
Profits are valuable, but they’re not everything. At StockStory, we help you identify the companies that have real staying power. That said, here are three profitable companies to avoid and some better opportunities instead.
Teradyne (TER)
Trailing 12-Month GAAP Operating Margin: 18.3%
Sporting most major chip manufacturers as its customers, Teradyne (NASDAQ: TER) is a US-based supplier of automated test equipment for semiconductors as well as other technologies and devices.
Why Are We Cautious About TER?
- Products and services are facing end-market challenges during this cycle, as seen in its flat sales over the last five years
- Day-to-day expenses have swelled relative to revenue over the last five years as its operating margin fell by 14.4 percentage points
- Sales over the last five years were less profitable as its earnings per share fell by 4.4% annually while its revenue was flat
Teradyne is trading at $137.58 per share, or 35.5x forward P/E. Read our free research report to see why you should think twice about including TER in your portfolio.
Union Pacific (UNP)
Trailing 12-Month GAAP Operating Margin: 40.3%
Part of the transcontinental railroad project, Union Pacific (NYSE: UNP) is a freight transportation company that operates a major railroad network.
Why Should You Dump UNP?
- Underwhelming unit sales over the past two years suggest it might have to lower prices to accelerate growth
- Earnings growth underperformed the sector average over the last two years as its EPS grew by just 2.9% annually
- Free cash flow margin shrank by 3.9 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
Union Pacific’s stock price of $227.50 implies a valuation ratio of 18.7x forward P/E. Check out our free in-depth research report to learn more about why UNP doesn’t pass our bar.
CSG (CSGS)
Trailing 12-Month GAAP Operating Margin: 11%
Powering billions of critical customer interactions annually, CSG Systems (NASDAQ: CSGS) provides cloud-based software platforms that help companies manage customer interactions, process payments, and monetize their services.
Why Do We Avoid CSGS?
- Annual revenue growth of 2.6% over the last two years was below our standards for the business services sector
- Modest revenue base of $1.21 billion gives it less fixed cost leverage and fewer distribution channels than larger companies
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
At $64.75 per share, CSG trades at 13.3x forward P/E. To fully understand why you should be careful with CSGS, check out our full research report (it’s free for active Edge members).
Stocks We Like More
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