Even if they go mostly unnoticed, industrial businesses are the backbone of our country. 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 19.6% return over the past six months has topped the S&P 500 by 8.6 percentage points.
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 is one industrials stock poised to generate sustainable market-beating returns and two we’re steering clear of.
Two Industrials Stocks to Sell:
Boise Cascade (BCC)
Market Cap: $2.44 billion
Formed through the merger of two lumber companies, Boise Cascade Company (NYSE: BCC) manufactures and distributes wood products and other building materials.
Why Should You Dump BCC?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 4.2% annually over the last two years
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 7.5 percentage points
- Waning returns on capital imply its previous profit engines are losing steam
Boise Cascade is trading at $69.20 per share, or 16.7x forward P/E. Check out our free in-depth research report to learn more about why BCC doesn’t pass our bar.
Ducommun (DCO)
Market Cap: $2.27 billion
California’s oldest company, Ducommun (NYSE: DCO) is a provider of engineering and manufacturing services for high-performance products primarily within the aerospace and defense industries.
Why Do We Think Twice About DCO?
- Backlog has dropped by 16% on average over the past two years, suggesting it’s losing orders as competition picks up
- Costs have risen faster than its revenue over the last five years, causing its operating margin to decline by 11.2 percentage points
- ROIC of 2.4% reflects management’s challenges in identifying attractive investment opportunities, and its shrinking returns suggest its past profit sources are losing steam
Ducommun’s stock price of $150.34 implies a valuation ratio of 33.3x forward P/E. Read our free research report to see why you should think twice about including DCO in your portfolio.
One Industrials Stock to Buy:
Blue Bird (BLBD)
Market Cap: $2.29 billion
With around a century of experience, Blue Bird (NASDAQ: BLBD) is a manufacturer of school buses and complementary parts.
Why Are We Bullish on BLBD?
- Annual revenue growth of 14.3% over the last five years was superb and indicates its market share increased during this cycle
- Free cash flow margin expanded by 21 percentage points over the last five years, providing additional flexibility for investments and share buybacks/dividends
- Rising returns on capital show management is finding more attractive investment opportunities
At $72.00 per share, Blue Bird trades at 13.6x forward P/E. Is now a good time to buy? Find out in our full research report, it’s free.
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