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 7.8% return over the past six months has topped the S&P 500 by 4.7 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. Keeping that in mind, here are three industrials stocks we’re passing on.

WESCO (WCC)

Market Cap: $13.1 billion

Based in Pittsburgh, WESCO (NYSE: WCC) provides electrical, industrial, and communications products and augments them with services such as supply chain management.

Why Are We Wary of WCC?

1. Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
2. Performance over the past two years shows its incremental sales were much less profitable, as its earnings per share fell by 5.9% annually
3. Low free cash flow margin of 1.5% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders

At $269.23 per share, WESCO trades at 17.1x forward P/E. Read our free research report to see why you should think twice about including WCC in your portfolio.

Veralto (VLTO)

Market Cap: $22.75 billion

Spun off from Danaher in 2023, Veralto (NYSE: VLTO) provides water analytics and treatment solutions.

Why Does VLTO Fall Short?

1. Sales trends were unexciting over the last four years as its 4.1% annual growth was below the typical industrials company
2. Projected sales growth of 6.3% for the next 12 months suggests sluggish demand

Veralto is trading at $92.16 per share, or 22.4x forward P/E. Dive into our free research report to see why there are better opportunities than VLTO.

Waste Connections (WCN)

Market Cap: $42.32 billion

Operating a network of municipal solid waste landfills in the U.S. and Canada, Waste Connections (NYSE: WCN) is North America's third-largest waste management company providing collection, disposal, and recycling services.

Why Is WCN Not Exciting?

1. Estimated sales growth of 4.9% for the next 12 months implies demand will slow from its two-year trend
2. Free cash flow margin shrank by 2.5 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
3. Low returns on capital reflect management’s struggle to allocate funds effectively, and its decreasing returns suggest its historical profit centers are aging

Waste Connections’s stock price of $165.51 implies a valuation ratio of 31.5x forward P/E. To fully understand why you should be careful with WCN, check out our full research report (it’s free).

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