3 Profitable Stocks That Fall Short
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".
Not all profitable companies are created equal, and that’s why we built StockStory - to help you find the ones that truly shine bright. That said, here are three profitable companies to avoid and some better opportunities instead.
Paychex (PAYX)
Trailing 12-Month GAAP Operating Margin: 37.1%
Once known as the go-to service for small business payroll needs, Paychex (NASDAQ:PAYX) provides payroll processing, HR services, employee benefits administration, and insurance solutions to small and medium-sized businesses.
Why Does PAYX Worry Us?
- 8.7% annual revenue growth over the last five years was slower than its software peers
- Expenses have increased as a percentage of revenue over the last year as its operating margin fell by 4.2 percentage points
- Projected 3.9 percentage point decline in its free cash flow margin next year reflects the company’s plans to increase its investments to defend its market position
At $109.06 per share, Paychex trades at 6.1x forward price-to-sales. Check out our free in-depth research report to learn more about why PAYX doesn’t pass our bar.
U.S. Physical Therapy (USPH)
Trailing 12-Month GAAP Operating Margin: 11.1%
With a nationwide footprint spanning 671 clinics across 42 states, U.S. Physical Therapy (NYSE:USPH) operates a network of outpatient physical therapy clinics and provides industrial injury prevention services to employers across the United States.
Why Does USPH Give Us Pause?
- Subscale operations are evident in its revenue base of $758.7 million, meaning it has fewer distribution channels than its larger rivals
- 8.6 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
U.S. Physical Therapy is trading at $78.93 per share, or 27.7x forward P/E. Dive into our free research report to see why there are better opportunities than USPH.
CoreCivic (CXW)
Trailing 12-Month GAAP Operating Margin: 9.6%
Originally founded in 1983 as the first private prison company in the United States, CoreCivic (NYSE:CXW) operates correctional facilities, detention centers, and residential reentry programs for government agencies across the United States.
Why Should You Sell CXW?
- Demand for its offerings was relatively low as its number of average available beds has underwhelmed
- Earnings growth underperformed the sector average over the last four years as its EPS grew by just 1.9% annually
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 9.2 percentage points
CoreCivic’s stock price of $19 implies a valuation ratio of 14.8x forward P/E. Read our free research report to see why you should think twice about including CXW in your portfolio.
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