Not all profitable companies are built to last - some rely on outdated models or unsustainable advantages.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

Cars.com (CARS)

Trailing 12-Month GAAP Operating Margin: 8.3%

Originally started as a joint venture between several media companies including The Washington Post and The New York Times, Cars.com (NYSE: CARS) is a digital marketplace that connects new and used car buyers and sellers.

Why Does CARS Give Us Pause?

1. Modest 1% annual growth in dealer customers over the last two years indicates potential challenges in customer acquisition and retention
2. Estimated sales growth of 1.1% for the next 12 months implies demand will slow from its three-year trend
3. Incremental sales over the last three years were less profitable as its earnings per share were flat while its revenue grew

Cars.com’s stock price of $9.03 implies a valuation ratio of 4.5x forward EV/EBITDA. To fully understand why you should be careful with CARS, check out our full research report (it’s free).

Deere (DE)

Trailing 12-Month GAAP Operating Margin: 12.8%

Revolutionizing agriculture with the first self-polishing cast-steel plow in the 1800s, Deere (NYSE: DE) manufactures and distributes advanced agricultural, construction, forestry, and turf care equipment.

Why Does DE Fall Short?

1. Sales tumbled by 12.3% annually over the last two years, showing market trends are working against its favor during this cycle
2. Waning returns on capital imply its previous profit engines are losing steam
3. 7× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings

At $616.28 per share, Deere trades at 32.2x forward P/E. Dive into our free research report to see why there are better opportunities than DE.

Credit Acceptance (CACC)

Trailing 12-Month GAAP Operating Margin: 34.9%

Founded in 1972 by Donald Foss to serve customers overlooked by traditional lenders, Credit Acceptance (NASDAQ: CACC) provides auto financing solutions that enable car dealers to sell vehicles to consumers with limited or impaired credit histories.

Why Do We Think CACC Will Underperform?

1. Muted 2.8% annual revenue growth over the last five years shows its demand lagged behind its financials peers
2. Incremental sales over the last two years were much less profitable as its earnings per share fell by 2% annually while its revenue grew
3. 10× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly

Credit Acceptance is trading at $466.50 per share, or 11x forward P/E. If you’re considering CACC for your portfolio, see our FREE research report to learn more.

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