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 7.5% over the past six months. This performance was discouraging since the S&P 500 stood firm.
A cautious approach is imperative when dabbling in these companies as the losers can be left for dead when the cycle naturally turns and the winners consolidate. Keeping that in mind, here are three industrials stocks we’re swiping left on.
Simpson (SSD)
Market Cap: $6.52 billion
Aiming to build safer and stronger buildings, Simpson (NYSE: SSD) designs and manufactures structural connectors, anchors, and other construction products.
Why Do We Think Twice About SSD?
- Sales trends were unexciting over the last two years as its 2.7% annual growth was below the typical industrials company
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 5.5 percentage points
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
At $155.45 per share, Simpson trades at 19x forward price-to-earnings. If you’re considering SSD for your portfolio, see our FREE research report to learn more.
United Parcel Service (UPS)
Market Cap: $97.55 billion
Trademarking its recognizable UPS Brown color, UPS (NYSE: UPS) offers package delivery, supply chain management, and freight forwarding services.
Why Is UPS Risky?
- Declining unit sales over the past two years show it’s struggled to increase its sales volumes and had to rely on price increases
- Earnings per share decreased by more than its revenue over the last two years, showing each sale was less profitable
- Diminishing returns on capital suggest its earlier profit pools are drying up
United Parcel Service’s stock price of $115.79 implies a valuation ratio of 13.2x forward price-to-earnings. To fully understand why you should be careful with UPS, check out our full research report (it’s free).
Champion Homes (SKY)
Market Cap: $5.39 billion
Founded in 1951, Champion Homes (NYSE: SKY) is a manufacturer of modular homes and buildings in North America.
Why Are We Cautious About SKY?
- Flat unit sales over the past two years suggest it might have to lower prices to accelerate growth
- Earnings per share decreased by more than its revenue over the last two years, partly because it diluted shareholders
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
Champion Homes is trading at $90.50 per share, or 25.2x forward price-to-earnings. Read our free research report to see why you should think twice about including SKY in your portfolio.
Stocks We Like More
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