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. Keeping that in mind, here are three profitable companies that don’t make the cut and some better opportunities instead.

Home Depot (HD)

Trailing 12-Month GAAP Operating Margin: 13%

Founded and headquartered in Atlanta, Georgia, Home Depot (NYSE: HD) is a home improvement retailer that sells everything from tools to building materials to appliances.

Why Are We Wary of HD?

1. Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its brick-and-mortar locations
2. Widely-available products (and therefore stiff competition) result in an inferior gross margin of 33.4% that must be offset through higher volumes
3. Earnings per share fell by 3.3% annually over the last three years while its revenue grew, showing its incremental sales were much less profitable

At $382.22 per share, Home Depot trades at 26x forward P/E. Read our free research report to see why you should think twice about including HD in your portfolio.

Tractor Supply (TSCO)

Trailing 12-Month GAAP Operating Margin: 9.5%

Started as a mail-order tractor parts business, Tractor Supply (NASDAQ: TSCO) is a retailer of general goods such as agricultural supplies, hardware, and pet food for the rural consumer.

Why Does TSCO Give Us Pause?

1. Large revenue base makes it harder to increase sales quickly, and its annual revenue growth of 3% over the last three years was below our standards for the consumer retail sector
2. Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
3. Gross margin of 36.3% is below its competitors, leaving less money for marketing and promotions

Tractor Supply is trading at $54.64 per share, or 25.4x forward P/E. Dive into our free research report to see why there are better opportunities than TSCO.

ESAB (ESAB)

Trailing 12-Month GAAP Operating Margin: 15.6%

Having played a significant role in the construction of the iconic Sydney Opera House, ESAB (NYSE: ESAB) manufactures and sells welding and cutting equipment for numerous industries.

Why Do We Pass on ESAB?

1. Sales stagnated over the last two years and signal the need for new growth strategies
2. Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
3. 3.2 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

ESAB’s stock price of $127.92 implies a valuation ratio of 22.5x forward P/E. Check out our free in-depth research report to learn more about why ESAB doesn’t pass our bar.

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