Industrials businesses quietly power the physical things we depend on, from cars and homes to e-commerce infrastructure. Their momentum is also rising as lower interest rates have incentivized higher capital spending. As a result, the industry has posted a 15.5% gain over the past six months, beating the S&P 500 by 11.9 percentage points.
Although these companies have produced results lately, a cautious approach is imperative. When the cycle naturally turns, the losers can be left for dead while the winners consolidate and take more of the market. Taking that into account, here are three industrials stocks we’re passing on.
Market Cap: $15.91 billion
Listed on the NYSE in 1947, Textron (NYSE:TXT) provides products and services in the aerospace, defense, industrial, and finance sectors.
Why Is TXT Not Exciting?
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Scale is a double-edged sword because it limits the company’s growth potential compared to its smaller competitors, as reflected in its below-average annual revenue increases of 4% for the last two years
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Earnings growth underperformed the sector average over the last two years as its EPS grew by just 4.5% annually
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Free cash flow margin shrank by 3.4 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
Textron’s stock price of $91.04 implies a valuation ratio of 14.1x forward P/E. Check out our free in-depth research report to learn more about why TXT doesn’t pass our bar.
Market Cap: $4.96 billion
With its enamel-coated copper wire used in WWI for the Allied forces, Belden (NYSE:BDC) designs, manufactures, and sells electronic components to various industries.
Why Are We Hesitant About BDC?
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Annual revenue growth of 4% over the last two years was below our standards for the industrials sector
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Earnings growth over the last two years fell short of the peer group average as its EPS only increased by 5.1% annually
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Waning returns on capital imply its previous profit engines are losing steam
At $128.97 per share, Belden trades at 15.5x forward P/E. If you’re considering BDC for your portfolio, see our FREE research report to learn more.
Market Cap: $2.75 billion
Operating under the trade name TrinityRail, Trinity (NYSE:TRN) is a provider of railcar products and services in North America.
Why Does TRN Worry Us?
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Product roadmap and go-to-market strategy need to be reconsidered as its backlog has averaged 27.8% declines over the past two years
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Projected sales for the next 12 months are flat and suggest demand will be subdued
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Free cash flow margin dropped by 22.9 percentage points over the last five years, implying the company became more capital intensive as competition picked up