Even if they go mostly unnoticed, industrial businesses are the backbone of our country. Their momentum is also rising as lower interest rates have incentivized higher capital spending. As a result, the industry has posted a 17% gain over the past six months, beating the S&P 500 by 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 are three industrials stocks we’re steering clear of.
Ingersoll Rand (IR)
Market Cap: $27.42 billion
Started with the invention of the steam drill, Ingersoll Rand (NYSE: IR) provides mission-critical air, gas, liquid, and solid flow creation solutions.
Why Does IR Worry Us?
- 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
- Estimated sales growth of 3.1% for the next 12 months implies demand will slow from its two-year trend
- Underwhelming 6.1% return on capital reflects management’s difficulties in finding profitable growth opportunities
Ingersoll Rand’s stock price of $71.05 implies a valuation ratio of 20.2x forward P/E. Check out our free in-depth research report to learn more about why IR doesn’t pass our bar.
Applied Industrial (AIT)
Market Cap: $11.58 billion
Formerly called The Ohio Ball Bearing Company, Applied Industrial (NYSE: AIT) distributes industrial products–everything from power tools to industrial valves–and services to a wide variety of industries.
Why Are We Cautious About AIT?
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Projected sales growth of 5.8% for the next 12 months suggests sluggish demand
- Earnings growth underperformed the sector average over the last two years as its EPS grew by just 5.4% annually
Applied Industrial is trading at $295.76 per share, or 26.8x forward P/E. If you’re considering AIT for your portfolio, see our FREE research report to learn more.
A. O. Smith (AOS)
Market Cap: $7.82 billion
Credited with the invention of the glass-lined water heater, A.O. Smith (NYSE: AOS) manufactures water heating and treatment products for various industries.
Why Are We Hesitant About AOS?
- Flat sales over the last two years suggest it must find different ways to grow during this cycle
- Earnings per share have contracted by 1.6% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
At $56.76 per share, A. O. Smith trades at 14.6x forward P/E. Dive into our free research report to see why there are better opportunities than AOS.
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