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.
Hertz (HTZ)
Trailing 12-Month GAAP Operating Margin: 2%
Started with a dozen Model T Fords, Hertz (NASDAQ:HTZ) is a global car rental company providing vehicle rental services to leisure and business travelers.
Why Do We Avoid HTZ?
- Annual sales declines of 3.8% for the past two years show its products and services struggled to connect with the market during this cycle
- Waning returns on capital imply its previous profit engines are losing steam
Hertz’s stock price of $2.07 implies a valuation ratio of 109.5x forward EV-to-EBITDA. To fully understand why you should be careful with HTZ, check out our full research report (it’s free).
Arrow Electronics (ARW)
Trailing 12-Month GAAP Operating Margin: 3.1%
Founded as a single retail store, Arrow Electronics (NYSE:ARW) provides electronic components and enterprise computing solutions to businesses globally.
Why Should You Dump ARW?
- Large revenue base makes it harder to increase sales quickly, and its annual revenue growth of 1.8% over the last five years was below our standards for the industrials sector
- Earnings per share fell by 1.5% annually over the last two years while its revenue grew, showing its incremental sales were much less profitable
- Eroding returns on capital suggest its historical profit centers are aging
At $206.67 per share, Arrow Electronics trades at 10.5x forward P/E. Dive into our free research report to see why there are better opportunities than ARW.
OPENLANE (OPLN)
Trailing 12-Month GAAP Operating Margin: 10.9%
Facilitating the sale of approximately 1.3 million used vehicles in 2023, OPENLANE (NYSE:OPLN) operates digital marketplaces that connect sellers and buyers of used vehicles across North America and Europe, facilitating wholesale transactions.
Why Are We Wary of OPLN?
- Sales were flat over the last five years, indicating it’s failed to expand this cycle
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
- 6× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
OPENLANE is trading at $39.92 per share, or 28.7x forward P/E. If you’re considering OPLN for your portfolio, see our FREE research report to learn more.
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