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".
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 to steer clear of and a few better alternatives.
Lithia (LAD)
Trailing 12-Month GAAP Operating Margin: 4.2%
With a strong presence in the Western US, Lithia Motors (NYSE: LAD) sells a wide range of vehicles, including new and used cars, trucks, SUVs, and luxury vehicles from various manufacturers.
Why Is LAD Not Exciting?
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its brick-and-mortar locations
- Gross margin of 15.4% is an output of its commoditized inventory
- High net-debt-to-EBITDA ratio of 8× increases the risk of forced asset sales or dilutive financing if operational performance weakens
Lithia is trading at $250.73 per share, or 7.1x forward P/E. If you’re considering LAD for your portfolio, see our FREE research report to learn more.
Dole (DOLE)
Trailing 12-Month GAAP Operating Margin: 2.4%
Known for its delicious pineapples and Hawaiian roots, Dole (NYSE: DOLE) is a global agricultural company specializing in fresh fruits and vegetables.
Why Do We Avoid DOLE?
- Lackluster 2% annual revenue growth over the last three years indicates the company is losing ground to competitors
- Commoditized products, bad unit economics, and high competition are reflected in its low gross margin of 8.1%
- Responsiveness to unforeseen market trends is restricted due to its substandard operating margin profitability
Dole’s stock price of $14.25 implies a valuation ratio of 10.5x forward P/E. To fully understand why you should be careful with DOLE, check out our full research report (it’s free).
Lennar (LEN)
Trailing 12-Month GAAP Operating Margin: 6.6%
One of the largest homebuilders in America, Lennar (NYSE: LEN) is known for constructing affordable, move-up, and retirement homes across a range of markets and communities.
Why Should You Dump LEN?
- Backlog has dropped by 11.4% on average over the past two years, suggesting it’s losing orders as competition picks up
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 6.9 percentage points
- Eroding returns on capital suggest its historical profit centers are aging
At $85.56 per share, Lennar trades at 14.1x forward P/E. Dive into our free research report to see why there are better opportunities than LEN.
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