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”.
A business making money today isn’t necessarily a winner, which is why we analyze companies across multiple dimensions at StockStory. That said, here are three profitable companies to steer clear of and a few better alternatives.
Herbalife (HLF)
Trailing 12-Month GAAP Operating Margin: 9.5%
With the first products sold out of the trunk of the founder’s car, Herbalife (NYSE:HLF) today offers a portfolio of shakes, supplements, personal care products, and weight management programs to help customers reach their nutritional and fitness goals.
Why Does HLF Give Us Pause?
- Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 2.1%
- Earnings per share fell by 8.3% annually over the last three years while its revenue grew, partly because it diluted shareholders
Herbalife is trading at $12.05 per share, or 4.4x forward P/E. Check out our free in-depth research report to learn more about why HLF doesn’t pass our bar.
Jazz Pharmaceuticals (JAZZ)
Trailing 12-Month GAAP Operating Margin: 19.5%
Originally founded in 2003 and now headquartered in Ireland following a 2012 tax inversion merger, Jazz Pharmaceuticals (NASDAQGS:JAZZ) develops and markets medicines for sleep disorders, epilepsy, and cancer, with a focus on treatments for patients with limited therapeutic options.
Why Are We Cautious About JAZZ?
- Efficiency has decreased over the last five years as its adjusted operating margin fell by 2.6 percentage points
- Low returns on capital reflect management’s struggle to allocate funds effectively
Jazz Pharmaceuticals’s stock price of $245.77 implies a valuation ratio of 9.9x forward P/E. Read our free research report to see why you should think twice about including JAZZ in your portfolio.
ePlus (PLUS)
Trailing 12-Month GAAP Operating Margin: 6.9%
Starting as a financing company in 1990 before evolving into a full-service technology provider, ePlus (NASDAQ:PLUS) provides comprehensive IT solutions, professional services, and financing options to help organizations optimize their technology infrastructure and supply chain processes.
Why Does PLUS Fall Short?
- Estimated sales growth of 4.3% for the next 12 months implies demand will slow from its two-year trend
- Earnings growth underperformed the sector average over the last two years as its EPS grew by just 6.5% annually
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
At $88.46 per share, ePlus trades at 16.6x forward P/E. If you’re considering PLUS for your portfolio, see our FREE research report to learn more.
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