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 18.1% return over the past six months has topped the S&P 500 by 8.9 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. On that note, here are three industrials stocks we’re passing on.
Mayville Engineering (MEC)
Market Cap: $296.2 million
Originally founded solely on tool and die manufacturing, Mayville Engineering Company (NYSE: MEC) specializes in metal fabrication, tube bending, and welding to be used in various industries.
Why Does MEC Worry Us?
- Annual sales declines of 2% for the past two years show its products and services struggled to connect with the market during this cycle
- Gross margin of 12.8% reflects its high production costs
- Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term
Mayville Engineering’s stock price of $14.58 implies a valuation ratio of 15.3x forward P/E. Read our free research report to see why you should think twice about including MEC in your portfolio.
Fortive (FTV)
Market Cap: $16.24 billion
Taking its name from the Latin root of "strong", Fortive (NYSE: FTV) manufactures products and develops industrial software for numerous industries.
Why Do We Pass on FTV?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Earnings per share lagged its peers over the last five years as they only grew by 1.5% annually
- ROIC of 5.5% reflects management’s challenges in identifying attractive investment opportunities, and its decreasing returns suggest its historical profit centers are aging
At $48.01 per share, Fortive trades at 17.8x forward P/E. Check out our free in-depth research report to learn more about why FTV doesn’t pass our bar.
Luxfer (LXFR)
Market Cap: $366.4 million
With its magnesium alloys used in the construction of the famous Spirit of St. Louis aircraft, Luxfer (NYSE: LXFR) offers specialized materials, components, and gas containment devices to various industries.
Why Are We Out on LXFR?
- Annual sales declines of 1.9% for the past two years show its products and services struggled to connect with the market during this cycle
- Free cash flow margin dropped by 7.8 percentage points over the last five years, implying the company became more capital intensive as competition picked up
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
Luxfer is trading at $13.70 per share, or 12.5x forward P/E. If you’re considering LXFR for your portfolio, see our FREE research report to learn more.
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