Industrials businesses quietly power the physical things we depend on, from cars and homes to e-commerce infrastructure. 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 6.6% over the past six months. This drop was disappointing since the S&P 500 held its ground.
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. Taking that into account, here are three industrials stocks we’re steering clear of.
Novanta (NOVT)
Market Cap: $4.63 billion
Originally a pioneer in the laser scanning industry during the late 1960s, Novanta (NASDAQ:NOVT) offers medicine and manufacturing technology to the medical, life sciences, and manufacturing industries.
Why Are We Cautious About NOVT?
- Sales trends were unexciting over the last two years as its 4.2% annual growth was below the typical industrials company
- Flat earnings per share over the last two years underperformed the sector average
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 7.5 percentage points
Novanta’s stock price of $131.25 implies a valuation ratio of 25.5x forward EV-to-EBITDA. To fully understand why you should be careful with NOVT, check out our full research report (it’s free).
VSE Corporation (VSEC)
Market Cap: $2.75 billion
With roots dating back to 1959 and a strategic focus on extending the life of transportation assets, VSE Corporation (NASDAQ:VSEC) provides aftermarket parts distribution and maintenance, repair, and overhaul services for aircraft and vehicle fleets in commercial and government markets.
Why Is VSEC Not Exciting?
- Competitive supply chain dynamics and steep production costs are reflected in its low gross margin of 12.3%
- Negative free cash flow raises questions about the return timeline for its investments
- Underwhelming 5% return on capital reflects management’s difficulties in finding profitable growth opportunities
At $133.28 per share, VSE Corporation trades at 36.4x forward P/E. If you’re considering VSEC for your portfolio, see our FREE research report to learn more.
3M (MMM)
Market Cap: $77.62 billion
Producers of the first asthma inhaler, 3M Company (NYSE:MMM) is a global conglomerate known for products in industries like healthcare, safety, electronics, and consumer goods.
Why Is MMM Risky?
- Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
- Earnings per share have dipped by 3.4% annually over the past five years, which is concerning because stock prices follow EPS over the long term
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
3M is trading at $145 per share, or 18.5x forward P/E. To fully understand why you should be careful with MMM, check out our full research report (it’s free).
High-Quality Stocks for All Market Conditions
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