Whether you see them or not, industrials businesses play a crucial part in our daily activities. Sure, they are at the whim of macroeconomic factors that influence capital spending (like interest rates), but the industry has held its ground over the past six months as its 11.2% return was almost identical to the S&P 500.
Nevertheless, investors must be mindful as the cycle can unexpectedly turn. When this inevitably happens, only the elite companies will survive and ultimately thrive. Taking that into account, here are three industrials stocks we’re passing on.
APi (APG)
Market Cap: $15.29 billion
Started in 1926 as an insulation contractor, APi (NYSE:APG) provides life safety solutions and specialty services for buildings and infrastructure.
Why Are We Wary of APG?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Responsiveness to unforeseen market trends is restricted due to its substandard operating margin profitability
- Low returns on capital reflect management’s struggle to allocate funds effectively
APi’s stock price of $36.96 implies a valuation ratio of 22.9x forward P/E. If you’re considering APG for your portfolio, see our FREE research report to learn more.
Snap-on (SNA)
Market Cap: $17.23 billion
Founded in 1920, Snap-on (NYSE:SNA) is a global provider of tools, equipment, and diagnostics for various industries such as vehicle repair, aerospace, and the military.
Why Is SNA Not Exciting?
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Flat earnings per share over the last two years underperformed the sector average
- Waning returns on capital imply its previous profit engines are losing steam
Snap-on is trading at $330.39 per share, or 16.7x forward P/E. To fully understand why you should be careful with SNA, check out our full research report (it’s free for active Edge members).
Johnson Controls (JCI)
Market Cap: $69.05 billion
Founded after patenting the electric room thermostat, Johnson Controls (NYSE:JCI) specializes in building products and technology solutions, including HVAC systems, fire and security systems, and energy storage.
Why Do We Pass on JCI?
- Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
- Earnings per share lagged its peers over the last two years as they only grew by 3.8% annually
- ROIC of 7.2% reflects management’s challenges in identifying attractive investment opportunities, and its decreasing returns suggest its historical profit centers are aging
At $113.88 per share, Johnson Controls trades at 24.6x forward P/E. Check out our free in-depth research report to learn more about why JCI doesn’t pass our bar.
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