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.
Insight Enterprises (NSIT)
Trailing 12-Month GAAP Operating Margin: 3.7%
With over 35 years of IT expertise and partnerships with more than 8,000 technology providers, Insight Enterprises (NASDAQ: NSIT) provides end-to-end digital transformation solutions that help businesses modernize their IT infrastructure and maximize the value of technology.
Why Do We Pass on NSIT?
- Flat sales over the last five years suggest it must find different ways to grow during this cycle
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 1.1%
- Earnings growth over the last two years fell short of the peer group average as its EPS only increased by 1.9% annually
Insight Enterprises is trading at $87.52 per share, or 8.5x forward P/E. To fully understand why you should be careful with NSIT, check out our full research report (it’s free).
Franklin Resources (BEN)
Trailing 12-Month GAAP Operating Margin: 8.4%
Operating under the widely recognized Franklin Templeton brand since 1947, Franklin Resources (NYSE: BEN) is a global investment management organization that offers financial services and solutions to individuals, institutions, and wealth advisors worldwide.
Why Should You Dump BEN?
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 3.3% annually while its revenue grew
- ROE of 8.5% reflects management’s challenges in identifying attractive investment opportunities
Franklin Resources’s stock price of $25.62 implies a valuation ratio of 9.9x forward P/E. If you’re considering BEN for your portfolio, see our FREE research report to learn more.
Essent Group (ESNT)
Trailing 12-Month GAAP Operating Margin: 65.9%
Serving as a crucial bridge between homebuyers and the American dream of homeownership, Essent Group (NYSE: ESNT) provides private mortgage insurance and title services that enable lenders to offer home loans with down payments of less than 20%.
Why Are We Hesitant About ESNT?
- Growth in insurance policies was lackluster over the last five years as its 3.1% annual growth underperformed the typical financial institution
- Expenses have increased as a percentage of revenue over the last two years as its pre-tax profit margin fell by 10.2 percentage points
- Incremental sales over the last two years were less profitable as its 5% annual earnings per share growth lagged its revenue gains
At $64.66 per share, Essent Group trades at 1.1x forward P/B. Check out our free in-depth research report to learn more about why ESNT doesn’t pass our bar.
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