Even if they go mostly unnoticed, industrial businesses are the backbone of our country. But they are at the whim of volatile macroeconomic factors that influence capital spending (like interest rates), and the market seems convinced that demand will slow. Due to this bearish outlook, the industry has tumbled by 2% over the past six months. This drawdown was disappointing since the S&P 500 climbed 5.9%.
Investors should tread carefully as timing cyclical companies is a challenging task, and any misstep can have you catching a falling knife. With that said, here are three industrials stocks best left ignored.
AECOM (ACM)
Market Cap: $12.7 billion
Founded in 1990 when a group of engineers from five companies decided to merge, AECOM (NYSE:ACM) provides various infrastructure consulting services.
Why Is ACM Not Exciting?
- Sales pipeline suggests its future revenue growth likely won’t meet our standards as its backlog hasn’t budged over the past two years
- Gross margin of 6.3% is below its competitors, leaving less money to invest in areas like marketing and R&D
- Responsiveness to unforeseen market trends is restricted due to its substandard operating profitability
At $96.59 per share, AECOM trades at 18.5x forward price-to-earnings. If you’re considering ACM for your portfolio, see our FREE research report to learn more.
Ryder (R)
Market Cap: $6.72 billion
As one of the first companies to introduce the idea of leasing trucks, Ryder (NYSE:R) provides rental vehicles to businesses and delivers packages directly to homes or businesses.
Why Do We Avoid R?
- Annual sales growth of 2.6% over the last two years lagged behind its industrials peers as its large revenue base made it difficult to generate incremental demand
- Earnings per share have dipped by 14.2% annually over the past two years, which is concerning because stock prices follow EPS over the long term
- 15.6 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
Ryder’s stock price of $159.42 implies a valuation ratio of 11.8x forward price-to-earnings. To fully understand why you should be careful with R, check out our full research report (it’s free).
Northrop Grumman (NOC)
Market Cap: $65.13 billion
Responsible for the development of the first stealth bomber, Northrop Grumman (NYSE:NOC) specializes in providing aerospace, defense, and security solutions for various industry applications.
Why Should You Sell NOC?
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Annual earnings per share growth of 1% underperformed its revenue over the last two years, showing its incremental sales were less profitable
- Waning returns on capital imply its previous profit engines are losing steam
Northrop Grumman is trading at $457.73 per share, or 16x forward price-to-earnings. If you’re considering NOC for your portfolio, see our FREE research report to learn more.
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