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 10.4% over the past six months. This drop was worse than the S&P 500’s 1.9% decline.
Investors should tread carefully as timing cyclical companies is a challenging task, and any misstep can have you catching a falling knife. Keeping that in mind, here are three industrials stocks we’re swiping left on.
Tennant (TNC)
Market Cap: $1.39 billion
As the world’s largest manufacturer of autonomous mobile robots, Tennant (NYSE:TNC) designs, manufactures, and sells cleaning products to various sectors.
Why Are We Hesitant About TNC?
- Muted 2.3% annual revenue growth over the last five years shows its demand lagged behind its industrials peers
- Estimated sales decline of 1% for the next 12 months implies a challenging demand environment
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 7.1 percentage points
Tennant’s stock price of $74.46 implies a valuation ratio of 12x forward P/E. To fully understand why you should be careful with TNC, check out our full research report (it’s free).
Ryder (R)
Market Cap: $6.22 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 Pass on R?
- Annual sales growth of 2.3% 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 contracted by 11% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance
- Free cash flow margin shrank by 14.1 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
At $150.35 per share, Ryder trades at 11.2x forward P/E. If you’re considering R for your portfolio, see our FREE research report to learn more.
C.H. Robinson Worldwide (CHRW)
Market Cap: $11.43 billion
Engaging in contracts with tens of thousands of transportation companies, C.H. Robinson (NASDAQ:CHRW) offers freight transportation and logistics services.
Why Is CHRW Risky?
- Sales tumbled by 12.1% annually over the last two years, showing market trends are working against its favor during this cycle
- Issuance of new shares over the last two years caused its earnings per share to fall by 13.7% annually, even worse than its revenue declines
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
C.H. Robinson Worldwide is trading at $96.30 per share, or 19.9x forward P/E. Check out our free in-depth research report to learn more about why CHRW doesn’t pass our bar.
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