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".
Profits are valuable, but they’re not everything. At StockStory, we help you identify the companies that have real staying power. That said, here is one profitable company that balances growth and profitability and two that may struggle to keep up.
Two Industrials Stocks to Sell:
Transcat (TRNS)
Trailing 12-Month GAAP Operating Margin: 5.5%
Serving the pharmaceutical, industrial manufacturing, energy, and chemical process industries, Transcat (NASDAQ: TRNS) provides measurement instruments and supplies.
Why Are We Wary of TRNS?
- Costs have risen faster than its revenue over the last five years, causing its operating margin to decline by 2.5 percentage points
- Issuance of new shares over the last two years caused its earnings per share growth of 2.7% to lag its revenue gains
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Transcat’s stock price of $57.18 implies a valuation ratio of 27.5x forward P/E. Read our free research report to see why you should think twice about including TRNS in your portfolio.
Otis (OTIS)
Trailing 12-Month GAAP Operating Margin: 14.5%
Credited with inventing the first hydraulic passenger elevator, Otis Worldwide (NYSE: OTIS) is an elevator and escalator manufacturing, installation and service company.
Why Does OTIS Worry Us?
- 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
- Estimated sales growth of 5% for the next 12 months is soft and implies weaker demand
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 2.1 percentage points
At $87.67 per share, Otis trades at 20.3x forward P/E. To fully understand why you should be careful with OTIS, check out our full research report (it’s free for active Edge members).
One Industrials Stock to Buy:
Comfort Systems (FIX)
Trailing 12-Month GAAP Operating Margin: 13.4%
Formed through the merger of 12 companies, Comfort Systems (NYSE: FIX) provides mechanical and electrical contracting services.
Why Is FIX a Top Pick?
- Demand is greater than supply as the company’s 33.6% average backlog growth over the past two years shows it’s securing new contracts and accumulating more orders than it can fulfill
- Share repurchases have amplified shareholder returns as its annual earnings per share growth of 74.2% exceeded its revenue gains over the last two years
- Rising returns on capital show management is finding more attractive investment opportunities
Comfort Systems is trading at $1,004 per share, or 31.6x forward P/E. Is now a good time to buy? Find out in our full research report, it’s free for active Edge members.
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