Not all profitable companies are built to last - some rely on outdated models or unsustainable advantages. Just because a business is in the green today doesn’t mean it will thrive tomorrow.
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 steer clear of and a few better alternatives.
Installed Building Products (IBP)
Trailing 12-Month GAAP Operating Margin: 12.5%
Founded in 1977, Installed Building Products (NYSE:IBP) is a company specializing in the installation of insulation, waterproofing, and other complementary building products for residential and commercial construction.
Why Does IBP Worry Us?
- 3.5% annual revenue growth over the last two years was slower than its industrials peers
- Sales are projected to tank by 3.1% over the next 12 months as demand evaporates
- Earnings per share lagged its peers over the last two years as they only grew by 5.3% annually
Installed Building Products is trading at $263.71 per share, or 26.4x forward P/E. Check out our free in-depth research report to learn more about why IBP doesn’t pass our bar.
Select Medical (SEM)
Trailing 12-Month GAAP Operating Margin: 6.3%
With a nationwide network spanning 46 states and over 2,700 healthcare facilities, Select Medical (NYSE:SEM) operates critical illness recovery hospitals, rehabilitation hospitals, outpatient rehabilitation clinics, and occupational health centers across the United States.
Why Is SEM Risky?
- Declining admissions over the past two years suggest it might have to lower prices to accelerate growth
- Forecasted revenue decline of 4.5% for the upcoming 12 months implies demand will fall even further
- Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 3.4% annually
Select Medical’s stock price of $12.87 implies a valuation ratio of 10.8x forward P/E. If you’re considering SEM for your portfolio, see our FREE research report to learn more.
U.S. Physical Therapy (USPH)
Trailing 12-Month GAAP Operating Margin: 10.1%
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 Do We Think Twice About USPH?
- Modest revenue base of $729.6 million gives it less fixed cost leverage and fewer distribution channels than larger companies
- Free cash flow margin dropped by 9 percentage points over the last five years, implying the company became more capital intensive as competition picked up
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
At $80.15 per share, U.S. Physical Therapy trades at 30.9x forward P/E. Read our free research report to see why you should think twice about including USPH in your portfolio.
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