Even if they go mostly unnoticed, industrial businesses are the backbone of our country. 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 27% return over the past six months has topped the S&P 500 by 17.9 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. Taking that into account, here are three industrials stocks best left ignored.
Kadant (KAI)
Market Cap: $3.99 billion
Headquartered in Massachusetts, Kadant (NYSE:KAI) is a global supplier of high-value, critical components and engineered systems used in process industries worldwide.
Why Does KAI Worry Us?
- Sales trends were unexciting over the last two years as its 3.8% annual growth was below the typical industrials company
- Earnings per share fell by 3.6% annually over the last two years while its revenue grew, showing its incremental sales were much less profitable
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 3.7 percentage points
Kadant’s stock price of $338.79 implies a valuation ratio of 34.4x forward P/E. To fully understand why you should be careful with KAI, check out our full research report (it’s free).
Sanmina (SANM)
Market Cap: $8.17 billion
Founded in 1980, Sanmina (NASDAQ:SANM) is an electronics manufacturing services company offering end-to-end solutions for various industries.
Why Does SANM Fall Short?
- Annual revenue growth of 5% over the last two years was below our standards for the industrials sector
- Competitive supply chain dynamics and steep production costs are reflected in its low gross margin of 8.2%
- Waning returns on capital imply its previous profit engines are losing steam
Sanmina is trading at $149.73 per share, or 14.3x forward P/E. Check out our free in-depth research report to learn more about why SANM doesn’t pass our bar.
GE Vernova (GEV)
Market Cap: $213.1 billion
Born from the energy business of industrial giant General Electric in a 2023 spin-off, GE Vernova (NYSE:GEV) designs, manufactures, and services power generation equipment and grid technologies to help customers build more reliable and sustainable electric systems.
Why Is GEV Not Exciting?
- Large revenue base makes it harder to increase sales quickly, and its annual revenue growth of 3.6% over the last four years was below our standards for the industrials sector
- Gross margin of 16.2% reflects its high production costs
- Persistent operating margin losses suggest the business manages its expenses poorly
At $791.50 per share, GE Vernova trades at 57.1x forward P/E. If you’re considering GEV for your portfolio, see our FREE research report to learn more.
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