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 16.6% return over the past six months has topped the S&P 500 by 2.5 percentage points.
Regardless of these results, investors should tread carefully. The diversity of companies in this space means that not all are created equal or well-positioned for the inescapable downturn. With that said, here are three industrials stocks best left ignored.
UFP Industries (UFPI)
Market Cap: $5.38 billion
Beginning as a lumber supplier in the 1950s, UFP Industries (NASDAQ: UFPI) is a holding company making building materials for the construction, retail, and industrial sectors.
Why Do We Think UFPI Will Underperform?
- Declining unit sales over the past two years indicate demand is soft and that the company may need to revise its strategy
- Performance over the past two years shows each sale was less profitable as its earnings per share dropped by 20.4% annually, worse than its revenue
- Eroding returns on capital suggest its historical profit centers are aging
UFP Industries is trading at $90.40 per share, or 16.5x forward P/E. To fully understand why you should be careful with UFPI, check out our full research report (it’s free for active Edge members).
Illinois Tool Works (ITW)
Market Cap: $72.06 billion
Founded by Byron Smith, an investor who held over 100 patents, Illinois Tool Works (NYSE: ITW) manufactures engineered components and specialized equipment for numerous industries.
Why Do We Think Twice About ITW?
- Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
- Anticipated sales growth of 3.3% for the next year implies demand will be shaky
- Flat earnings per share over the last two years underperformed the sector average
Illinois Tool Works’s stock price of $248.32 implies a valuation ratio of 22.5x forward P/E. Dive into our free research report to see why there are better opportunities than ITW.
Silgan Holdings (SLGN)
Market Cap: $4.14 billion
Established in 1987, Silgan Holdings (NYSE: SLGN) is a supplier of rigid packaging for consumer goods products, specializing in metal containers, closures, and plastic packaging.
Why Do We Steer Clear of SLGN?
- Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
- High input costs result in an inferior gross margin of 16.8% that must be offset through higher volumes
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 1.5% for the last five years
At $39.21 per share, Silgan Holdings trades at 10.5x forward P/E. Check out our free in-depth research report to learn more about why SLGN doesn’t pass our bar.
Stocks We Like More
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