Not all profitable companies are built to last - some rely on outdated models or unsustainable advantages.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

Profits are valuable, but they’re not everything. At StockStory, we help you identify the companies that have real staying power. That said, here are three profitable companies to avoid and some better opportunities instead.

Darden (DRI)

Trailing 12-Month GAAP Operating Margin: 11.3%

Founded in 1968 as Red Lobster, Darden $(DRI)$ is a leading American restaurant company that owns and operates a portfolio of popular restaurant brands.

Why Do We Think Twice About DRI?

1. Large revenue base makes it harder to increase sales quickly, and its annual revenue growth of 6% over the last six years was below our standards for the restaurant sector
2. Poor same-store sales performance over the past two years indicates it’s having trouble bringing new diners into its restaurants
3. Gross margin of 21.5% reflects the bad unit economics inherent in most restaurant businesses

At $202.44 per share, Darden trades at 19.2x forward P/E. Check out our free in-depth research report to learn more about why DRI doesn’t pass our bar.

Simpson (SSD)

Trailing 12-Month GAAP Operating Margin: 19.6%

Aiming to build safer and stronger buildings, Simpson $(SSD)$ designs and manufactures structural connectors, anchors, and other construction products.

Why Does SSD Worry Us?

1. Muted 2.6% annual revenue growth over the last two years shows its demand lagged behind its industrials peers
2. Free cash flow margin shrank by 10.7 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
3. Waning returns on capital imply its previous profit engines are losing steam

Simpson’s stock price of $181.36 implies a valuation ratio of 21.5x forward P/E. If you’re considering SSD for your portfolio, see our FREE research report to learn more.

Thermo Fisher $(TMO.UK)$

Trailing 12-Month GAAP Operating Margin: 17.1%

With over 14,000 sales personnel and a portfolio spanning more than 2,500 technology manufacturers, Thermo Fisher Scientific $(TMO)$ provides scientific equipment, reagents, consumables, software, and laboratory services to pharmaceutical, biotech, academic, and healthcare customers worldwide.

Why Is TMO Not Exciting?

1. Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
2. Expenses have increased as a percentage of revenue over the last five years as its adjusted operating margin fell by 10.2 percentage points
3. Waning returns on capital imply its previous profit engines are losing steam

Thermo Fisher is trading at $460.80 per share, or 19.5x forward P/E. Read our free research report to see why you should think twice about including TMO in your portfolio.

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