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, their overall demand was steady over the past six months as the industry’s 7.1% return has closely followed the S&P 500.
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. On that note, here are three industrials stocks that may face trouble.
GXO Logistics (GXO)
Market Cap: $5.91 billion
With notable customers such as Nike and Apple, GXO (NYSE: GXO) manages outsourced supply chains and warehousing for various companies.
Why Does GXO Give Us Pause?
- 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
- Incremental sales over the last two years were much less profitable as its earnings per share fell by 2.2% annually while its revenue grew
- High net-debt-to-EBITDA ratio of 6× could force the company to raise capital at unfavorable terms if market conditions deteriorate
At $51.66 per share, GXO Logistics trades at 19.7x forward P/E. Dive into our free research report to see why there are better opportunities than GXO.
Hub Group (HUBG)
Market Cap: $2.24 billion
Started with $10,000, Hub Group (NASDAQ: HUBG) is a provider of intermodal, truck brokerage, and logistics services, facilitating transportation solutions for businesses worldwide.
Why Do We Avoid HUBG?
- Declining unit sales over the past two years suggest it might have to lower prices to accelerate growth
- Performance over the past two years shows each sale was less profitable as its earnings per share dropped by 41.4% annually, worse than its revenue
- Eroding returns on capital suggest its historical profit centers are aging
Hub Group’s stock price of $36.63 implies a valuation ratio of 16.7x forward P/E. To fully understand why you should be careful with HUBG, check out our full research report (it’s free).
Vulcan Materials (VMC)
Market Cap: $35.76 billion
Founded in 1909, Vulcan Materials (NYSE: VMC) is a producer of construction aggregates, primarily crushed stone, sand, and gravel.
Why Does VMC Fall Short?
- Sales were flat over the last two years, indicating it’s failed to expand this cycle
- Number of tons shipped has disappointed over the past two years, indicating weak demand for its offerings
- Free cash flow margin dropped by 5.6 percentage points over the last five years, implying the company became more capital intensive as competition picked up
Vulcan Materials is trading at $270.73 per share, or 32.3x forward P/E. Read our free research report to see why you should think twice about including VMC in your portfolio.
High-Quality Stocks for All Market Conditions
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