Industrials businesses quietly power the physical things we depend on, from cars and homes to e-commerce infrastructure. Still, their generally high capital requirements expose them to the ups and downs of economic cycles, and the industry’s six-month return of 3.7% has fallen short of the S&P 500’s 5.3% rise.
Some companies can grow regardless of the economic backdrop, but the odds aren’t great for the ones we’re analyzing today. With that said, here are three industrials stocks we’re passing on.
Builders FirstSource (BLDR)
Market Cap: $14.51 billion
Headquartered in Irving, TX, Builders FirstSource (NYSE: BLDR) is a construction materials manufacturer that offers a variety of lumber and lumber-related building products.
Why Do We Think Twice About BLDR?
- Annual sales declines of 7.2% for the past two years show its products and services struggled to connect with the market during this cycle
- Earnings per share have dipped by 22.1% annually over the past two years, which is concerning because stock prices follow EPS over the long term
- Diminishing returns on capital suggest its earlier profit pools are drying up
At $132.20 per share, Builders FirstSource trades at 15.2x forward P/E. Read our free research report to see why you should think twice about including BLDR in your portfolio.
Boeing (BA)
Market Cap: $171.9 billion
One of the companies that forms a duopoly in the commercial aircraft market, Boeing (NYSE: BA) develops, manufactures, and services commercial airplanes, defense products, and space systems.
Why Should You Dump BA?
- Flat unit sales over the past two years suggest it might have to lower prices to accelerate growth
- Negative free cash flow raises questions about the return timeline for its investments
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
Boeing is trading at $229.33 per share, or 166.1x forward P/E. To fully understand why you should be careful with BA, check out our full research report (it’s free).
Generac (GNRC)
Market Cap: $11.35 billion
With its name deriving from a combination of “generating” and “AC”, Generac (NYSE: GNRC) offers generators and other power products for residential, industrial, and commercial use.
Why Are We Hesitant About GNRC?
- Muted 4.7% annual revenue growth over the last two years shows its demand lagged behind its industrials peers
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 6 percentage points
- Diminishing returns on capital suggest its earlier profit pools are drying up
Generac’s stock price of $196.06 implies a valuation ratio of 23.9x forward P/E. Dive into our free research report to see why there are better opportunities than GNRC.
Stocks We Like More
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