Whether you see them or not, industrials businesses play a crucial part in our daily activities. Still, their generally high capital requirements expose them to the ups and downs of economic cycles, and the market seems to be baking in a prolonged downturn as the industry has shed 2.5% over the past six months. This drop is a stark contrast from the S&P 500’s 10.8% gain.
Only some companies are subject to these dynamics, however, and a handful of high-quality businesses can deliver earnings growth in any environment. On that note, here is one resilient industrials stock at the top of our wish list and two best left ignored.
Two Industrials Stocks to Sell:
PACCAR (PCAR)
Market Cap: $68.02 billion
Founded more than a century ago, PACCAR (NASDAQ:PCAR) designs and manufactures commercial trucks of various weights and sizes for the commercial trucking industry.
Why Are We Wary of PCAR?
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Products and services are facing significant end-market challenges during this cycle as sales have declined by 11.2% annually over the last two years
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Earnings per share have contracted by 29% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance
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Eroding returns on capital suggest its historical profit centers are aging
PACCAR is trading at $129.22 per share, or 19.7x forward P/E. Check out our free in-depth research report to learn more about why PCAR doesn’t pass our bar.
Cummins (CMI)
Market Cap: $78.84 billion
With more than half of the heavy-duty truck market using its engines at one point, Cummins (NYSE:CMI) offers engines and power systems.
Why Do We Think Twice About CMI?
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Flat sales over the last two years suggest it must find different ways to grow during this cycle
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Competitive supply chain dynamics and steep production costs are reflected in its low gross margin of 24.8%
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Poor free cash flow margin of 5.4% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
At $572.50 per share, Cummins trades at 17.4x forward P/E. If you’re considering CMI for your portfolio, see our FREE research report to learn more.
One Industrials Stock to Watch:
CACI (CACI)
Market Cap: $13.53 billion
Founded to commercialize SIMSCRIPT, CACI International (NYSE:CACI) offers defense, intelligence, and IT solutions to support national security and government transformation efforts.
Why Could CACI Be a Winner?
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Annual revenue growth of 11.8% over the past two years was outstanding, reflecting market share gains this cycle
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Sales outlook for the upcoming 12 months implies the business will stay on its desirable two-year growth trajectory
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Share repurchases have amplified shareholder returns as its annual earnings per share growth of 19% exceeded its revenue gains over the last two years