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 17.8% return over the past six months has topped the S&P 500 by 4.2 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. With that said, here are three industrials stocks that may face trouble.
Simpson (SSD)
Market Cap: $6.98 billion
Aiming to build safer and stronger buildings, Simpson (NYSE: SSD) designs and manufactures structural connectors, anchors, and other construction products.
Why Is SSD Not Exciting?
- Sales trends were unexciting over the last two years as its 2.8% annual growth was below the typical industrials company
- Earnings per share fell by 4% annually over the last two years while its revenue grew, showing its incremental sales were much less profitable
- Waning returns on capital imply its previous profit engines are losing steam
At $167.46 per share, Simpson trades at 19.3x forward P/E. If you’re considering SSD for your portfolio, see our FREE research report to learn more.
DNOW (DNOW)
Market Cap: $1.49 billion
Spun off from National Oilwell Varco, DNOW (NYSE: DNOW) provides distribution and supply chain solutions for the energy and industrial end markets.
Why Does DNOW Give Us Pause?
- Annual revenue growth of 2.5% over the last two years was below our standards for the industrials sector
- Gross margin of 22.7% reflects its high production costs
- Earnings per share were flat over the last two years and fell short of the peer group average
DNOW’s stock price of $14.17 implies a valuation ratio of 21.4x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than DNOW.
Masco (MAS)
Market Cap: $13.18 billion
Headquartered just outside of Detroit, MI, Masco (NYSE: MAS) designs and manufactures home-building products such as glass shower doors, decorative lighting, bathtubs, and faucets.
Why Are We Out on MAS?
- 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 2.3% for the next 12 months is soft and implies weaker demand
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
Masco is trading at $63.45 per share, or 14.9x forward P/E. Check out our free in-depth research report to learn more about why MAS doesn’t pass our bar.
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