Yahoo Finance

Not all profitable companies are built to last - some rely on outdated models or unsustainable advantages.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. Keeping that in mind, here are three profitable companies that don’t make the cut and some better opportunities instead.

Dollar General (DG)

Trailing 12-Month GAAP Operating Margin: 4.2%

Appealing to the budget-conscious consumer, Dollar General (NYSE:DG) is a discount retailer that sells a wide range of household essentials, groceries, apparel/beauty products, and seasonal merchandise.

Why Do We Think Twice About DG?

1. Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand

2. Commoditized inventory, bad unit economics, and high competition are reflected in its low gross margin of 29.9%

3. 6× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly

Dollar General is trading at $92.10 per share, or 15.7x forward P/E. To fully understand why you should be careful with DG, check out our full research report (it’s free).

Red Rock Resorts (RRR)

Trailing 12-Month GAAP Operating Margin: 29.3%

Founded in 1976, Red Rock Resorts (NASDAQ:RRR) operates a range of casino resorts and entertainment properties, primarily in the Las Vegas metropolitan area.

Why Should You Sell RRR?

1. Lackluster 1.7% annual revenue growth over the last five years indicates the company is losing ground to competitors

2. Demand will likely fall over the next 12 months as Wall Street expects flat revenue

3. Eroding returns on capital suggest its historical profit centers are aging

Red Rock Resorts’s stock price of $43.43 implies a valuation ratio of 26.9x forward P/E. If you’re considering RRR for your portfolio, see our FREE research report to learn more.

Surgery Partners (SGRY)

Trailing 12-Month GAAP Operating Margin: 11.2%

With more than 180 locations across 33 states serving as alternatives to traditional hospital settings, Surgery Partners (NASDAQ:SGRY) operates a national network of outpatient surgical facilities including ambulatory surgery centers and short-stay surgical hospitals.

Why Does SGRY Worry Us?

1. Weak unit sales over the past two years indicate demand is soft and that the company may need to revise its strategy

2. Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 4.2 percentage points

3. High net-debt-to-EBITDA ratio of 6× could force the company to raise capital at unfavorable terms if market conditions deteriorate