Even if they go mostly unnoticed, industrial businesses are the backbone of our country. They are also bound to benefit from a friendlier regulatory environment with the Trump administration, and this excitement has led to a six-month gain of 15.5% for the sector - higher than the S&P 500’s 3.5% return.
Nevertheless, investors must be mindful as the cycle can unexpectedly turn. When this inevitably happens, only the elite companies will survive and ultimately thrive. On that note, here are three industrials stocks that may face trouble.
Norfolk Southern (NSC)
Market Cap: $66.3 billion
Starting with a single route from Virginia to North Carolina, Norfolk Southern (NYSE: NSC) is a freight transportation company operating a major railroad network across the eastern United States.
Why Are We Out on NSC?
- Sales stagnated over the last two years and signal the need for new growth strategies
- Costs have risen faster than its revenue over the last five years, causing its operating margin to decline by 4.1 percentage points
- Free cash flow margin dropped by 8.4 percentage points over the last five years, implying the company became more capital intensive as competition picked up
Norfolk Southern’s stock price of $294.88 implies a valuation ratio of 24.5x forward P/E. Check out our free in-depth research report to learn more about why NSC doesn’t pass our bar.
RTX (RTX)
Market Cap: $273.5 billion
Originally focused on refrigeration technology, Raytheon (NSYE:RTX) provides a a variety of products and services to the aerospace and defense industries.
Why Are We Hesitant About RTX?
- Annual sales growth of 6.5% over the last five years lagged behind its industrials peers as its large revenue base made it difficult to generate incremental demand
- Estimated sales growth of 5.6% for the next 12 months implies demand will slow from its two-year trend
- ROIC of 4.5% reflects management’s challenges in identifying attractive investment opportunities
RTX is trading at $202.79 per share, or 29.7x forward P/E. To fully understand why you should be careful with RTX, check out our full research report (it’s free).
Avery Dennison (AVY)
Market Cap: $13.37 billion
Founded as Kum Kleen Products, Avery Dennison (NYSE: AVY) is a manufacturer of adhesive materials, display graphics, and packaging products, serving various industries.
Why Do We Think Twice About AVY?
- 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
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 4.5%
- Diminishing returns on capital suggest its earlier profit pools are drying up
At $173.84 per share, Avery Dennison trades at 17.4x forward P/E. If you’re considering AVY for your portfolio, see our FREE research report to learn more.
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