Even if they go mostly unnoticed, industrial businesses are the backbone of our country. Still, their generally high capital requirements expose them to the ups and downs of economic cycles, and the market seems confused about where we could go next. This uncertainty has led to a flat return for the industry over the past six months while the S&P 500 was up 3.6%.
Investors should tread carefully as timing cyclical companies is a challenging task, and any misstep can have you catching a falling knife. Keeping that in mind, here are three industrials stocks that may face trouble.
DistributionNOW (DNOW)
Market Cap: $1.62 billion
Spun off from National Oilwell Varco, DistributionNOW (NYSE:DNOW) provides distribution and supply chain solutions for the energy and industrial end markets.
Why Do We Think DNOW Will Underperform?
- Sales tumbled by 4.3% annually over the last five years, showing market trends are working against its favor during this cycle
- Poor expense management has led to an operating margin of -0.3% that is below the industry average
- Earnings per share have contracted by 1.7% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance
DistributionNOW is trading at $15.30 per share, or 19.4x forward price-to-earnings. Read our free research report to see why you should think twice about including DNOW in your portfolio.
MRC Global (MRC)
Market Cap: $985.4 million
Producing bomb casings and tracks for vehicles during WWII, MRC (NYSE:MRC) offers pipes, valves, and fitting products for various industries.
Why Should You Sell MRC?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 3.9% annually over the last five years
- Earnings per share fell by 3.9% annually over the last two years while its revenue was flat, partly because it diluted shareholders
- Underwhelming 2% return on capital reflects management’s difficulties in finding profitable growth opportunities
At $11.51 per share, MRC Global trades at 10.4x forward price-to-earnings. To fully understand why you should be careful with MRC, check out our full research report (it’s free).
Fortive (FTV)
Market Cap: $26.07 billion
Taking its name from the Latin root of "strong", Fortive (NYSE:FTV) manufactures products and develops industrial software for numerous industries.
Why Is FTV Not Exciting?
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Estimated sales growth of 1.2% for the next 12 months implies demand will slow from its two-year trend
- Performance over the past five years was negatively impacted by new share issuances as its earnings per share grew slower than its revenue
Fortive’s stock price of $76 implies a valuation ratio of 18.5x forward price-to-earnings. Dive into our free research report to see why there are better opportunities than FTV.
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