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 avoid and some better opportunities instead.

Adobe (ADBE)

Trailing 12-Month GAAP Operating Margin: 36.1%

Originally named after Adobe Creek that ran behind co-founder John Warnock’s house, Adobe (NASDAQ:ADBE) develops software products used for digital content creation, document management, and marketing solutions across desktop, mobile, and cloud platforms.

Why Are We Hesitant About ADBE?

  1. Customers had second thoughts about committing to its platform over the last year as its average billings growth of 12.3% underwhelmed
  2. Estimated sales growth of 9.8% for the next 12 months is soft and implies weaker demand
  3. Operating margin failed to increase over the last year, indicating the company couldn’t optimize its expenses

At $271.97 per share, Adobe trades at 4x forward price-to-sales. Check out our free in-depth research report to learn more about why ADBE doesn’t pass our bar.

H&R Block (HRB)

Trailing 12-Month GAAP Operating Margin: 23%

Founded in 1955 by brothers Henry W. Bloch and Richard A. Bloch, H&R Block (NYSE:HRB) is a tax preparation company offering professional tax assistance and financial solutions to individuals and small businesses.

Why Do We Pass on HRB?

  1. 1.9% annual revenue growth over the last five years was slower than its consumer discretionary peers
  2. Earnings growth over the last five years fell short of the peer group average as its EPS only increased by 4.6% annually
  3. Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
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H&R Block is trading at $52.77 per share, or 8.4x forward P/E. To fully understand why you should be careful with HRB, check out our full research report (it’s free).

ABM (ABM)

Trailing 12-Month GAAP Operating Margin: 3.5%

With roots dating back to 1909 as a window washing company, ABM Industries (NYSE:ABM) provides integrated facility management, infrastructure, and mobility solutions across various sectors including commercial, manufacturing, education, and aviation.

Why Are We Wary of ABM?

  1. 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
  2. Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term
  3. Low free cash flow margin of 1.7% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders

ABM’s stock price of $47.14 implies a valuation ratio of 11.5x forward P/E. Dive into our free research report to see why there are better opportunities than ABM.

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