Whether you see them or not, industrials businesses play a crucial part in our daily activities. But they are at the whim of volatile macroeconomic factors that influence capital spending (like interest rates), and the market seems convinced that demand will slow. Due to this bearish outlook, the industry has tumbled by 10.4% over the past six months. This performance was worse than the S&P 500’s 1.9% loss.

A cautious approach is imperative when dabbling in these companies as the losers can be left for dead when the cycle naturally turns and the winners consolidate. Taking that into account, here are three industrials stocks we’re passing on.

Old Dominion Freight Line (ODFL)

Market Cap: $34.45 billion

With its name deriving from the Commonwealth of Virginia’s nickname, Old Dominion (NASDAQ: ODFL) delivers less-than-truckload (LTL) and full-container load freight.

Why Does ODFL Fall Short?

1. Declining unit sales over the past two years indicate demand is soft and that the company may need to revise its strategy
2. Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term
3. Free cash flow margin dropped by 5.1 percentage points over the last five years, implying the company became more capital intensive as competition picked up

Old Dominion Freight Line’s stock price of $164 implies a valuation ratio of 28.9x forward P/E. Dive into our free research report to see why there are better opportunities than ODFL.

Titan International (TWI)

Market Cap: $484.2 million

Acquiring Goodyear’s farm tire business in 2005, Titan (NSYE:TWI) is a manufacturer and supplier of wheels, tires, and undercarriages used in off-highway vehicles such as construction vehicles.

Why Do We Pass on TWI?

1. Products and services are facing significant end-market challenges during this cycle as sales have declined by 7.4% annually over the last two years
2. High input costs result in an inferior gross margin of 14% that must be offset through higher volumes
3. Sales were less profitable over the last two years as its earnings per share fell by 93.4% annually, worse than its revenue declines

Titan International is trading at $7.60 per share, or 21x forward P/E. Check out our free in-depth research report to learn more about why TWI doesn’t pass our bar.

AAR (AIR)

Market Cap: $2.29 billion

The first third-party MRO approved by the FAA for Safety Management System Requirements, AAR (NYSE: AIR) is a provider of aircraft maintenance services

Why Do We Think Twice About AIR?

1. Sales trends were unexciting over the last five years as its 3.9% annual growth was below the typical industrials company
2. Low free cash flow margin of 0.9% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
3. Underwhelming 6.3% return on capital reflects management’s difficulties in finding profitable growth opportunities

At $64.50 per share, AAR trades at 14.9x forward P/E. If you’re considering AIR for your portfolio, see our FREE research report to learn more.

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