Even if they go mostly unnoticed, industrial businesses are the backbone of our country. Their momentum is also rising as lower interest rates have incentivized higher capital spending. As a result, the industry has posted a 18% gain over the past six months, beating the S&P 500 by 8 percentage points.
Regardless of these results, investors should tread carefully. The diversity of companies in this space means that not all are created equal or well-positioned for the inescapable downturn. With that said, here is one resilient industrials stock at the top of our wish list and two that may face trouble.
Two Industrials Stocks to Sell:
Donaldson (DCI)
Market Cap: $9.69 billion
Playing a vital role in the historic Apollo 11 mission, Donaldson (NYSE:DCI) manufacturers and sells filtration equipment for various industries.
Why Does DCI Worry Us?
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Constant currency revenue growth has disappointed over the past two years and shows demand was soft
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Projected sales growth of 4.3% for the next 12 months suggests sluggish demand
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Diminishing returns on capital suggest its earlier profit pools are drying up
Donaldson is trading at $83.67 per share, or 13.4x forward EV-to-EBITDA. If you’re considering DCI for your portfolio, see our FREE research report to learn more.
Universal Logistics (ULH)
Market Cap: $374.4 million
Founded in 1932, Universal Logistics (NASDAQ:ULH) is a provider of customized transportation and logistics solutions operating throughout the United States and in Mexico, Canada, and Colombia.
Why Is ULH Risky?
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Customers postponed purchases of its products and services this cycle as its revenue declined by 5.2% annually over the last two years
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Waning returns on capital imply its previous profit engines are losing steam
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Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders
Universal Logistics’s stock price of $14.20 implies a valuation ratio of 18.2x forward P/E. To fully understand why you should be careful with ULH, check out our full research report (it’s free).
One Industrials Stock to Buy:
APi (APG)
Market Cap: $18.04 billion
Started in 1926 as an insulation contractor, APi (NYSE:APG) provides life safety solutions and specialty services for buildings and infrastructure.
Why Is APG a Top Pick?
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Market share has increased this cycle as its 18.6% annual revenue growth over the last five years was exceptional
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Performance over the past two years shows its incremental sales were extremely profitable, as its annual earnings per share growth of 18.4% outpaced its revenue gains
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Free cash flow margin increased by 8.7 percentage points over the last five years, giving the company more capital to invest or return to shareholders