Not all profitable companies are built to last - some rely on outdated models or unsustainable advantages.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.
A business making money today isn’t necessarily a winner, which is why we analyze companies across multiple dimensions at StockStory. Keeping that in mind, here are three profitable companies to steer clear of and a few better alternatives.
TreeHouse Foods (THS)
Trailing 12-Month GAAP Operating Margin: 3.1%
Whether it be packaged crackers, broths, or beverages, Treehouse Foods (NYSE: THS) produces a wide range of private-label foods for grocery and food service customers.
Why Do We Avoid THS?
- Shrinking unit sales over the past two years show it’s struggled to move its products and had to rely on price increases
- Gross margin of 16.5% is below its competitors, leaving less money to invest in areas like marketing and production facilities
- ROIC of 1.4% reflects management’s challenges in identifying attractive investment opportunities
At $20.44 per share, TreeHouse Foods trades at 10.6x forward P/E. Dive into our free research report to see why there are better opportunities than THS.
Frontdoor (FTDR)
Trailing 12-Month GAAP Operating Margin: 18.2%
Established in 2018 as a spin-off from ServiceMaster Global Holdings, Frontdoor (NASDAQ: FTDR) is a provider of home warranty and service plans.
Why Does FTDR Give Us Pause?
- Sluggish trends in its home service plans suggest customers aren’t adopting its solutions as quickly as the company hoped
- Free cash flow margin is forecasted to shrink by 2.4 percentage points in the coming year, suggesting the company will consume more capital to keep up with its competitors
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
Frontdoor is trading at $57.99 per share, or 18.9x forward P/E. To fully understand why you should be careful with FTDR, check out our full research report (it’s free).
Interface (TILE)
Trailing 12-Month GAAP Operating Margin: 10.1%
Pioneering carbon-neutral flooring since its founding in 1973, Interface (NASDAQ: TILE) is a global manufacturer of modular carpet tiles, luxury vinyl tile (LVT), and rubber flooring that specializes in carbon-neutral and sustainable flooring solutions.
Why Do We Think TILE Will Underperform?
- Products and services are facing end-market challenges during this cycle, as seen in its flat sales over the last five years
- Performance over the past five years shows each sale was less profitable, as its earnings per share fell by 3.5% annually
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
Interface’s stock price of $20.07 implies a valuation ratio of 7.3x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including TILE in your portfolio.
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