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 35.1% return over the past six months has topped the S&P 500 by 11.2 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. Keeping that in mind, here are three industrials stocks we’re passing on.
Middleby (MIDD)
Market Cap: $6.59 billion
Holding a Guinness World Record for creating the world’s fastest conveyor pizza oven, Middleby (NYSE: MIDD) is a food service and equipment manufacturer.
Why Should You Dump MIDD?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Estimated sales growth of 2.1% for the next 12 months is soft and implies weaker demand
- Earnings growth underperformed the sector average over the last two years as its EPS grew by just 1.2% annually
Middleby is trading at $130 per share, or 14.9x forward P/E. If you’re considering MIDD for your portfolio, see our FREE research report to learn more.
Moog (MOG.A)
Market Cap: $6.67 billion
Responsible for the flight control actuation system integrated in the B-2 stealth bomber, Moog (NYSE: MOG.A) provides precision motion control solutions used in aerospace and defense applications
Why Does MOG.A Worry Us?
- 4.9% annual revenue growth over the last five years was slower than its industrials peers
- 6.6 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
Moog’s stock price of $210.62 implies a valuation ratio of 22.8x forward P/E. To fully understand why you should be careful with MOG.A, check out our full research report (it’s free for active Edge members).
Ford (F)
Market Cap: $52.32 billion
Established to make automobiles accessible to a broader segment of the population, Ford (NYSE: F) designs, manufactures, and sells a variety of automobiles, trucks, and electric vehicles.
Why Are We Out on F?
- Flat vehicles sold over the past two years suggest it might have to lower prices to accelerate growth
- Earnings per share fell by 22.5% annually over the last two years while its revenue grew, showing its incremental sales were much less profitable
- 9× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
At $13.12 per share, Ford trades at 11.4x forward P/E. Check out our free in-depth research report to learn more about why F doesn’t pass our bar.
Stocks We Like More
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