Industrials businesses quietly power the physical things we depend on, from cars and homes to e-commerce infrastructure. Unfortunately, this role also comes with a demand profile tethered to the ebbs and flows of the broader economy, and investors seem to be forecasting a downturn - over the past six months, the industry has pulled back by 2.4%. This performance was discouraging since the S&P 500 returned 1.1%.
Investors should tread carefully as timing cyclical companies is a challenging task, and any misstep can have you catching a falling knife. On that note, here are three industrials stocks we’re steering clear of.
Methode Electronics (MEI)
Market Cap: $324.8 million
Founded in 1946, Methode Electronics (NYSE: MEI) is a global supplier of custom-engineered solutions for Original Equipment Manufacturers (OEMs).
Why Should You Sell MEI?
- Sales were flat over the last five years, indicating it’s failed to expand this cycle
- Free cash flow margin shrank by 19.6 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Methode Electronics’s stock price of $9.10 implies a valuation ratio of 13.7x forward P/E. Dive into our free research report to see why there are better opportunities than MEI.
Packaging Corporation of America (PKG)
Market Cap: $16.64 billion
Founded in 1959, Packaging Corporation of America (NYSE: PKG) produces containerboard and corrugated packaging products as well as displays and package protection.
Why Do We Think PKG Will Underperform?
- Muted 1.4% annual revenue growth over the last two years shows its demand lagged behind its industrials peers
- Gross margin of 22.7% is below its competitors, leaving less money to invest in areas like marketing and R&D
- Earnings per share have contracted by 4.2% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance
At $185.59 per share, Packaging Corporation of America trades at 11.4x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including PKG in your portfolio.
Silgan Holdings (SLGN)
Market Cap: $5.75 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 Is SLGN Risky?
- Annual sales declines of 3% for the past two years show its products and services struggled to connect with the market during this cycle
- 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
- Earnings per share have contracted by 2.7% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance
Silgan Holdings is trading at $53.70 per share, or 12.9x forward P/E. Check out our free in-depth research report to learn more about why SLGN doesn’t pass our bar.
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