A company with profits isn’t always a great investment. Some struggle to maintain growth, face looming threats, or fail to reinvest wisely, limiting their future potential.
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.
FormFactor (FORM)
Trailing 12-Month GAAP Operating Margin: 6.1%
With customers across the foundry and fabless markets, FormFactor (NASDAQ: FORM) is a US-based provider of test and measurement technologies for semiconductors.
Why Are We Out on FORM?
- 4.4% annual revenue growth over the last five years was slower than its semiconductor peers
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 2.4%
- Expenses have increased as a percentage of revenue over the last five years as its operating margin fell by 6.1 percentage points
FormFactor’s stock price of $30.35 implies a valuation ratio of 20.5x forward P/E. Read our free research report to see why you should think twice about including FORM in your portfolio.
Orion (ORN)
Trailing 12-Month GAAP Operating Margin: 1.5%
Established in 1994, Orion (NYSE: ORN) provides construction services for marine infrastructure and industrial projects.
Why Do We Avoid ORN?
- Sales trends were unexciting over the last five years as its 2.4% annual growth was below the typical industrials company
- Earnings per share fell by 10.1% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
- Low free cash flow margin of -0.2% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
At $8.10 per share, Orion trades at 49.9x forward P/E. Dive into our free research report to see why there are better opportunities than ORN.
Kennametal (KMT)
Trailing 12-Month GAAP Operating Margin: 8.7%
Involved in manufacturing hard tips of anti-tank projectiles in World War II, Kennametal (NYSE: KMT) is a provider of industrial materials and tools for various sectors.
Why Do We Steer Clear of KMT?
- 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
- Estimated sales for the next 12 months are flat and imply a softer demand environment
- Earnings per share have dipped by 1.8% annually over the past five years, which is concerning because stock prices follow EPS over the long term
Kennametal is trading at $21 per share, or 17.5x forward P/E. Check out our free in-depth research report to learn more about why KMT doesn’t pass our bar.
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