Even if they go mostly unnoticed, industrial businesses are the backbone of our country. But this role also comes with a demand profile tethered to the ebbs and flows of the broader economy. Thankfully, industrial end markets were stable over the past six months as the industry’s 11.4% gain has nearly mirrored the S&P 500.
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 industrials stock boasting a durable advantage and two we’re swiping left on.
Two Industrials Stocks to Sell:
Astec (ASTE)
Market Cap: $1.02 billion
Inventing the first ever double-barrel hot-mix asphalt plant, Astec (NASDAQ: ASTE) provides machines and equipment for building roads, processing raw materials, and producing concrete.
Why Are We Wary of ASTE?
- Sales pipeline suggests its future revenue growth won’t meet our standards as its backlog averaged 28.2% declines over the past two years
- High input costs result in an inferior gross margin of 23.9% that must be offset through higher volumes
- Cash burn makes us question whether it can achieve sustainable long-term growth
At $44.66 per share, Astec trades at 13.9x forward P/E. To fully understand why you should be careful with ASTE, check out our full research report (it’s free for active Edge members).
Covenant Logistics (CVLG)
Market Cap: $558.6 million
Started with 25 trucks and 50 trailers, Covenant Logistics (NASDAQ: CVLG) is a provider of expedited long haul freight services, offering a range of logistics solutions.
Why Should You Sell CVLG?
- Products and services are facing end-market challenges during this cycle, as seen in its flat sales over the last two years
- 12.3 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
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
Covenant Logistics’s stock price of $22.30 implies a valuation ratio of 12.1x forward P/E. Read our free research report to see why you should think twice about including CVLG in your portfolio.
One Industrials Stock to Watch:
ITT (ITT)
Market Cap: $14.99 billion
Playing a crucial role in the development of the first transatlantic television transmission in 1956, ITT (NYSE: ITT) provides motion and fluid handling equipment for various industries
Why Are We Fans of ITT?
- Healthy operating margin of 17.5% shows it’s a well-run company with efficient processes
- Free cash flow margin grew by 17.4 percentage points over the last five years, giving the company more chips to play with
- ROIC punches in at 20.4%, illustrating management’s expertise in identifying profitable investments
ITT is trading at $174.24 per share, or 23.7x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free for active Edge members.
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