Not all profitable companies are built to last - some rely on outdated models or unsustainable advantages.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.

Skyworks Solutions (SWKS)

Trailing 12-Month GAAP Operating Margin: 11.2%

Result of a merger of Alpha Industries and the wireless communications division of Conexant, Skyworks Solutions $(SWKS)$ is a designer and manufacturer of chips used in smartphones, autos, and industrial applications to amplify, filter, and process wireless signals.

Why Do We Pass on SWKS?

1. Products and services are facing significant end-market challenges during this cycle as sales have declined by 10.1% annually over the last two years
2. Projected sales decline of 8% over the next 12 months indicates demand will continue deteriorating
3. Efficiency has decreased over the last five years as its operating margin fell by 21.5 percentage points

At $68.18 per share, Skyworks Solutions trades at 17x forward P/E. Read our free research report to see why you should think twice about including SWKS in your portfolio.

Trex (TREX)

Trailing 12-Month GAAP Operating Margin: 22.5%

Addressing the demand for aesthetically-pleasing and unique outdoor living spaces, Trex Company $(TREX)$ makes wood-alternative decking, railing, and patio furniture.

Why Does TREX Worry Us?

1. Day-to-day expenses have swelled relative to revenue over the last five years as its operating margin fell by 3.3 percentage points
2. 5.4 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
3. Diminishing returns on capital suggest its earlier profit pools are drying up

Trex is trading at $61.77 per share, or 25.5x forward P/E. Dive into our free research report to see why there are better opportunities than TREX.

MSC Industrial $(MSM.AU)$

Trailing 12-Month GAAP Operating Margin: 8.2%

Founded in NYC’s Little Italy, MSC Industrial Direct $(MSM)$ provides industrial supplies and equipment, offering vast and reliable selection for customers such as contractors

Why Do We Avoid MSM?

1. Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
2. Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 3.5%
3. Earnings per share fell by 5.6% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable

MSC Industrial’s stock price of $87.27 implies a valuation ratio of 22.5x forward P/E. If you’re considering MSM for your portfolio, see our FREE research report to learn more.

Stocks We Like More

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