Whether you see them or not, industrials businesses play a crucial part in our daily activities. Still, their generally high capital requirements expose them to the ups and downs of economic cycles, and the market seems to be baking in a prolonged downturn as the industry has shed 11.2% over the past six months. This drop was worse than the S&P 500’s 5.6% decline.
Investors should tread carefully as timing cyclical companies is a challenging task, and any misstep can have you catching a falling knife. With that said, here are three industrials stocks best left ignored.
Array (ARRY)
Market Cap: $806.8 million
Going public in October 2020, Array (NASDAQ: ARRY) is a global manufacturer of ground-mounting tracking systems for utility and distributed generation solar energy projects.
Why Are We Out on ARRY?
- Declining unit sales over the past two years suggest it might have to lower prices to accelerate growth
- Cash-burning history makes us doubt the long-term viability of its business model
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
Array’s stock price of $5.29 implies a valuation ratio of 6.8x forward price-to-earnings. If you’re considering ARRY for your portfolio, see our FREE research report to learn more.
The Toro Company (TTC)
Market Cap: $6.86 billion
Ceasing all production to support the war effort during World War II, Toro (NYSE: TTC) offers outdoor equipment for residential, commercial, and agricultural use.
Why Do We Think TTC Will Underperform?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 1.6% annually over the last two years
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 5.5 percentage points
- Diminishing returns on capital suggest its earlier profit pools are drying up
At $68.51 per share, The Toro Company trades at 15.4x forward price-to-earnings. Check out our free in-depth research report to learn more about why TTC doesn’t pass our bar.
Emerson Electric (EMR)
Market Cap: $58.93 billion
Founded in 1890, Emerson Electric (NYSE: EMR) is a multinational technology and engineering company providing solutions in the industrial, commercial, and residential markets.
Why Is EMR Not Exciting?
- Products and services are facing end-market challenges during this cycle, as seen in its flat sales over the last five years
- Estimated sales growth of 4.7% for the next 12 months implies demand will slow from its two-year trend
- Waning returns on capital imply its previous profit engines are losing steam
Emerson Electric is trading at $104.45 per share, or 17.3x forward price-to-earnings. Dive into our free research report to see why there are better opportunities than EMR.
Stocks We Like More
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