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 is one profitable company that leverages its financial strength to beat the competition and two best left off your watchlist.
Two Stocks to Sell:
American Eagle (AEO)
Trailing 12-Month GAAP Operating Margin: 5.1%
With a heavy focus on denim, American Eagle Outfitters (NYSE: AEO) is a specialty retailer offering an assortment of apparel and accessories to young adults.
Why Does AEO Worry Us?
- Lackluster 2.2% annual revenue growth over the last three years indicates the company is losing ground to competitors
- Conservative approach to adding new stores shows management is focused on improving existing location performance
- ROIC of 9% reflects management’s challenges in identifying attractive investment opportunities, and its decreasing returns suggest its historical profit centers are aging
At $25.96 per share, American Eagle trades at 15.6x forward P/E. Check out our free in-depth research report to learn more about why AEO doesn’t pass our bar.
Super Group (SGHC)
Trailing 12-Month GAAP Operating Margin: 16.1%
With betting operations spanning 20 jurisdictions and attracting nearly 5 million monthly customers, Super Group (NYSE: SGHC) operates global online sports betting and gaming platforms through its two primary offerings: the Betway sports betting brand and Spin multi-brand casino portfolio.
Why Do We Think SGHC Will Underperform?
- Customer growth was choppy over the past two years, suggesting that increasing competition is causing challenges in landing new contracts
- Earnings per share fell by 6% annually over the last four years while its revenue grew, showing its incremental sales were much less profitable
- Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 1.5 percentage points
Super Group’s stock price of $10.11 implies a valuation ratio of 14.4x forward P/E. Read our free research report to see why you should think twice about including SGHC in your portfolio.
One Stock to Buy:
Rollins (ROL)
Trailing 12-Month GAAP Operating Margin: 19.5%
Operating under multiple brands like Orkin and HomeTeam Pest Defense, Rollins (NYSE: ROL) provides pest and wildlife control services to residential and commercial customers.
Why Are We Bullish on ROL?
- Market share has increased this cycle as its 11.5% annual revenue growth over the last five years was exceptional
- Offerings are mission-critical for businesses and lead to a best-in-class gross margin of 52.3%
- Impressive free cash flow profitability enables the company to fund new investments or reward investors with share buybacks/dividends, and its recently improved profitability means it has even more resources to invest or distribute
Rollins is trading at $62.21 per share, or 50x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free.
High-Quality Stocks for All Market Conditions
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