Even if they go mostly unnoticed, industrial businesses are the backbone of our country. Their momentum is also rising as lower interest rates have incentivized higher capital spending. As a result, the industry has posted a 9.1% gain over the past six months, beating the S&P 500 by 4.4 percentage points.
Although these companies have produced results lately, a cautious approach is imperative. When the cycle naturally turns, the losers can be left for dead while the winners consolidate and take more of the market. With that said, here are three industrials stocks we’re passing on.
Cummins (CMI)
Market Cap: $55.42 billion
With more than half of the heavy-duty truck market using its engines at one point, Cummins (NYSE: CMI) offers engines and power systems.
Why Are We Hesitant About CMI?
- Sizable revenue base leads to growth challenges as its 2.3% annual revenue increases over the last two years fell short of other industrials companies
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 6.9 percentage points
- Eroding returns on capital suggest its historical profit centers are aging
At $402.74 per share, Cummins trades at 19.7x forward P/E. If you’re considering CMI for your portfolio, see our FREE research report to learn more.
Columbus McKinnon (CMCO)
Market Cap: $416.1 million
With 19 different brands across the globe, Columbus McKinnon (NASDAQ: CMCO) offers material handling equipment for the construction, manufacturing, and transportation industries.
Why Is CMCO Risky?
- Sales were flat over the last two years, indicating it’s failed to expand this cycle
- Performance over the past two years shows each sale was less profitable, as its earnings per share fell by 9.3% annually
- Free cash flow margin shrank by 7.4 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
Columbus McKinnon is trading at $14.65 per share, or 5.4x forward P/E. Read our free research report to see why you should think twice about including CMCO in your portfolio.
Methode Electronics (MEI)
Market Cap: $238.8 million
Founded in 1946, Methode Electronics (NYSE: MEI) is a global supplier of custom-engineered solutions for Original Equipment Manufacturers (OEMs).
Why Do We Steer Clear of MEI?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 5.7% annually over the last two years
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
Methode Electronics’s stock price of $6.78 implies a valuation ratio of 10.1x forward P/E. Check out our free in-depth research report to learn more about why MEI doesn’t pass our bar.
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