Industrials businesses quietly power the physical things we depend on, from cars and homes to e-commerce infrastructure. 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 18.2% return over the past six months has topped the S&P 500 by 5.2 percentage points.
Although these companies have produced results lately, a cautious approach is imperative. When the cycle naturally turns, the losers can be left for dead while the winners consolidate and take more of the market. With that said, here is one industrials stock boasting a durable advantage and two that may face trouble.
Two Industrials Stocks to Sell:
Cummins (CMI)
Market Cap: $69.22 billion
With more than half of the heavy-duty truck market using its engines at one point, Cummins (NYSE:CMI) offers engines and power systems.
Why Are We Hesitant About CMI?
- Flat sales over the last two years suggest it must find different ways to grow during this cycle
- Projected sales for the next 12 months are flat and suggest demand will be subdued
- Diminishing returns on capital suggest its earlier profit pools are drying up
Cummins’s stock price of $502.13 implies a valuation ratio of 20.8x forward P/E. If you’re considering CMI for your portfolio, see our FREE research report to learn more.
CSX (CSX)
Market Cap: $67.96 billion
Established as part of the Chessie System and Seaboard Coast Line Industries merger, CSX (NASDAQ:CSX) is a transportation company specializing in freight rail services.
Why Should You Dump CSX?
- Underwhelming unit sales over the past two years indicate demand is soft and that the company may need to revise its strategy
- Earnings per share decreased by more than its revenue over the last two years, showing each sale was less profitable
- Free cash flow margin dropped by 18.9 percentage points over the last five years, implying the company became more capital intensive as competition picked up
CSX is trading at $36.62 per share, or 19.8x forward P/E. Check out our free in-depth research report to learn more about why CSX doesn’t pass our bar.
One Industrials Stock to Watch:
Itron (ITRI)
Market Cap: $4.24 billion
Founded by a small group of engineers who wanted to build a more efficient way to read utility meters, Itron (NASDAQ:ITRI) offers energy and water management products for the utility industry, municipalities, and industrial customers.
Why Are We Positive On ITRI?
- Operating margin expanded by 9.3 percentage points over the last five years as it scaled and became more efficient
- Incremental sales significantly boosted profitability as its annual earnings per share growth of 46% over the last two years outstripped its revenue performance
- Free cash flow margin increased by 7.1 percentage points over the last five years, giving the company more capital to invest or return to shareholders
At $94.59 per share, Itron trades at 14.3x forward P/E. Is now the right time to buy? See for yourself in our comprehensive research report, it’s free for active Edge members .
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