Industrials businesses quietly power the physical things we depend on, from cars and homes to e-commerce infrastructure. 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 20.6% over the past six months. This performance was worse than the S&P 500’s 12.8% fall.
Investors should tread carefully as timing cyclical companies is a challenging task, and any misstep can have you catching a falling knife. Taking that into account, here are three industrials stocks we’re passing on.
Northwest Pipe (NWPX)
Market Cap: $394.3 million
Playing a large role in the Integrated Pipeline (IPL) project in Texas to deliver ~350 million gallons of water per day, Northwest Pipe (NASDAQ: NWPX) is a manufacturer of pipeline systems for water infrastructure.
Why Should You Sell NWPX?
- Sales trends were unexciting over the last two years as its 3.7% annual growth was below the typical industrials company
- Performance over the past two years shows its incremental sales were much less profitable, as its earnings per share fell by 2.9% annually
- Free cash flow margin dropped by 7.8 percentage points over the last five years, implying the company became more capital intensive as competition picked up
Northwest Pipe’s stock price of $38.07 implies a valuation ratio of 11.6x forward price-to-earnings. Dive into our free research report to see why there are better opportunities than NWPX.
Snap-on (SNA)
Market Cap: $16.51 billion
Founded in 1920, Snap-on (NYSE: SNA) is a global provider of tools, equipment, and diagnostics for various industries such as vehicle repair, aerospace, and the military.
Why Do We Think Twice About SNA?
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 2.7%
- 4.2 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
Snap-on is trading at $309.37 per share, or 15.5x forward price-to-earnings. Read our free research report to see why you should think twice about including SNA in your portfolio.
Graco (GGG)
Market Cap: $12.84 billion
Founded in 1926, Graco (NYSE: GGG) is an industrial company specializing in the development and manufacturing of fluid-handling systems and products.
Why Are We Wary of GGG?
- Flat sales over the last two years suggest it must find different ways to grow during this cycle
- Earnings growth over the last two years fell short of the peer group average as its EPS only increased by 2.3% annually
- Waning returns on capital imply its previous profit engines are losing steam
At $74.01 per share, Graco trades at 24.6x forward price-to-earnings. To fully understand why you should be careful with GGG, check out our full research report (it’s free).
Stocks We Like More
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