Industrials businesses quietly power the physical things we depend on, from cars and homes to e-commerce infrastructure. Unfortunately, this role also comes with a demand profile tethered to the ebbs and flows of the broader economy, and the industry is currently lagging as its six-month return of 5.9% has trailed the S&P 500’s 8.2% gain.
Some companies can grow regardless of the economic backdrop, but the odds aren’t great for the ones we’re analyzing today. With that said, here are three industrials stocks we’re passing on.
Landstar (LSTR)
Market Cap: $7.17 billion
Covering billions of miles throughout North America, Landstar (NASDAQ: LSTR) is a transportation company specializing in freight and last-mile delivery services.
Why Do We Steer Clear of LSTR?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 2.8% annually over the last two years
- Earnings per share have contracted by 8.1% annually over the last five 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
Landstar’s stock price of $211.33 implies a valuation ratio of 34.3x forward P/E. Read our free research report to see why you should think twice about including LSTR in your portfolio.
Mercury Systems (MRCY)
Market Cap: $6.02 billion
Founded in 1981, Mercury Systems (NASDAQ: MRCY) specializes in providing processing subsystems and components for primarily defense applications.
Why Does MRCY Give Us Pause?
- Muted 1.7% annual revenue growth over the last five years shows its demand lagged behind its industrials peers
- Suboptimal cost structure is highlighted by its history of operating margin losses
- Revenue growth over the past five years was nullified by the company’s new share issuances as its earnings per share fell by 13.6% annually
At $100.30 per share, Mercury Systems trades at 70x forward P/E. If you’re considering MRCY for your portfolio, see our FREE research report to learn more.
Kennametal (KMT)
Market Cap: $2.62 billion
Involved in manufacturing hard tips of anti-tank projectiles in World War II, Kennametal (NYSE: KMT) is a provider of industrial materials and tools for various sectors.
Why Does KMT Worry Us?
- Muted 2% annual revenue growth over the last two years shows its demand lagged behind its industrials peers
- 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
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
Kennametal is trading at $34.14 per share, or 6x forward P/E. Check out our free in-depth research report to learn more about why KMT doesn’t pass our bar.
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