Whether you see them or not, industrials businesses play a crucial part in our daily activities. But their prominence also brings high exposure to the ups and downs of economic cycles. Luckily, the tide is turning in their favor as the industry’s 13.3% return over the past six months has topped the S&P 500 by 7.5 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. Keeping that in mind, here are two industrials stocks we think can generate sustainable market-beating returns and one we’re passing on.
One Industrials Stock to Sell:
Insteel (IIIN)
Market Cap: $484.9 million
Growing from a small wire manufacturer to one of the largest in the U.S., Insteel (NYSE: IIIN) provides steel wire reinforcing products for concrete.
Why Do We Think Twice About IIIN?
- 5.9% annual revenue growth over the last five years was slower than its industrials peers
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 5 percentage points
- Diminishing returns on capital suggest its earlier profit pools are drying up
Insteel is trading at $25.56 per share, or 15.1x forward P/E. If you’re considering IIIN for your portfolio, see our FREE research report to learn more.
Two Industrials Stocks to Watch:
Parker-Hannifin (PH)
Market Cap: $125.8 billion
Founded in 1917, Parker Hannifin (NYSE: PH) is a manufacturer of motion and control systems for a wide variety of mobile, industrial and aerospace markets.
Why Is PH on Our Radar?
- Highly efficient business model is illustrated by its impressive 18.5% operating margin, and its rise over the last five years was fueled by some leverage on its fixed costs
- Share repurchases over the last five years enabled its annual earnings per share growth of 19.7% to outpace its revenue gains
- Robust free cash flow margin of 14.8% gives it many options for capital deployment, and its growing cash flow gives it even more resources to deploy
Parker-Hannifin’s stock price of $996.65 implies a valuation ratio of 30.5x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free.
Gorman-Rupp (GRC)
Market Cap: $1.73 billion
Powering fluid dynamics since 1934, Gorman-Rupp (NYSE: GRC) has evolved from its Ohio origins into a global manufacturer and seller of pumps and pump systems.
Why Are We Fans of GRC?
- Impressive 14.4% annual revenue growth over the last five years indicates it’s winning market share this cycle
- Operating margin expanded by 4.3 percentage points over the last five years as it scaled and became more efficient
- Additional sales over the last two years increased its profitability as the 25.1% annual growth in its earnings per share outpaced its revenue
At $65.61 per share, Gorman-Rupp trades at 29.4x forward P/E. Is now the time to initiate a position? See for yourself in our full research report, it’s free.
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