Companies always love to highlight to investors how profitable they are, and how quickly earnings can grow. But whenever a company makes a lot of money and has the potential to increase those earnings, that always provides plenty of inspiration for competitors. If competitors are able to steal share, those growth projections can go up in smoke.
On that note, below are three companies that are suffering that exact fate. You might want to be careful before buying their stocks.
Lululemon Athletica (NASDAQ: LULU) is one of the best examples of a company that makes incredibly high margins, inspiring plenty of competitors to enter the market. Last year’s numbers tell the story, with a gross profit margin above 50% and an operating income margin at nearly 25%.
Lululemon made things worse for itself with an embarrassing product recall, followed by ill-timed remarks from founder Chip Wilson late last year. As a result, the stock price has not done well, falling by nearly 50% over the past 12 months.
So has that created a buying opportunity? Well, not necessarily. The company still trades at more than 20 times earnings, a big number for a company facing intensifying competition. If Lululemon is unable to defend its turf, the stock could slide a lot further.
2. Thomson Reuters
Information services provider Thomson Reuters (TSX: TRI)(NYSE: TRI) has also had some trouble with competition, mainly in its financial and risk division. Powerful competitors like Bloomberg and low-cost alternatives like FactSet and Capital IQ have steadily been stealing share over the past five years.
Thomson has had the essentially same problem as Lululemon. The company makes a very nice profit margin on its products, providing plenty of incentive for competitors to step in. As a result, Thomson’s shares have only risen 4% per year over the past three years.
Has that created an opportunity to buy Thomson’s shares at a discount? Well, not really. The company trades at about 16 times forward earnings, and unlike Lululemon, is not even growing.
BlackBerry (TSX: BB)(NASDAQ: BBRY) is the poster child in Canada for a company that made lots of money at one point, then got crushed by the competition. Just look at what happened in fiscal year 2008: the company’s gross margin was greater than 50% and operating margin was 29%. No wonder its competitors were so aggressive in trying to steal share.
Now of course the story is completely different, with BlackBerry losing money and new CEO John Chen trying to turn the company around. At this point, buying the company’s shares is really a bet on whether or not Mr. Chen will be successful. Time will tell if it’s a bet worth taking.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Benjamin Sinclair holds no positions in any of the stocks mentioned in this article.