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 25.5% gain over the past six months, beating the S&P 500 by 7.8 percentage points.
Regardless of these results, investors should tread carefully. The diversity of companies in this space means that not all are created equal or well-positioned for the inescapable downturn. With that said, here are three industrials stocks that may face trouble.
Transcat (TRNS)
Market Cap: $712.1 million
Serving the pharmaceutical, industrial manufacturing, energy, and chemical process industries, Transcat (NASDAQ: TRNS) provides measurement instruments and supplies.
Why Does TRNS Give Us Pause?
- Efficiency has decreased over the last five years as its operating margin fell by 1.7 percentage points
- Low returns on capital reflect management’s struggle to allocate funds effectively, and its falling returns suggest its earlier profit pools are drying up
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Transcat’s stock price of $76.41 implies a valuation ratio of 22.1x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including TRNS in your portfolio.
U-Haul (UHAL)
Market Cap: $10.6 billion
Founded by a husband and wife duo, U-Haul (NYSE: UHAL) is a provider of rental trucks and storage facilities.
Why Do We Avoid UHAL?
- Sales were flat over the last two years, indicating it’s failed to expand this cycle
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
- Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders
U-Haul is trading at $57.85 per share, or 1.9x trailing 12-month price-to-sales. To fully understand why you should be careful with UHAL, check out our full research report (it’s free).
Lennar (LEN)
Market Cap: $36.11 billion
One of the largest homebuilders in America, Lennar (NYSE: LEN) is known for constructing affordable, move-up, and retirement homes across a range of markets and communities.
Why Is LEN Risky?
- Product roadmap and go-to-market strategy need to be reconsidered as its backlog has averaged 20.4% declines over the past two years
- Earnings per share fell by 11.4% annually over the last two years while its revenue grew, showing its incremental sales were much less profitable
- Free cash flow margin dropped by 13.5 percentage points over the last five years, implying the company became more capital intensive as competition picked up
At $140.67 per share, Lennar trades at 13.2x forward P/E. Check out our free in-depth research report to learn more about why LEN doesn’t pass our bar.
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