Even if they go mostly unnoticed, industrial businesses are the backbone of our country. Still, their generally high capital requirements expose them to the ups and downs of economic cycles, and the market seems confused about where we could go next. This uncertainty has led to a flat return for the industry over the past six months while the S&P 500 was up 16.6%.
Investors should tread carefully as timing cyclical companies is a challenging task, and any misstep can have you catching a falling knife. Taking that into account, here are three industrials stocks we’re passing on.
SmartRent (SMRT)
Market Cap: $226.1 million
Founded by an employee at a real estate rental company, SmartRent (NYSE: SMRT) provides smart home devices and software for multifamily residential properties, single-family rental homes, and student housing communities.
Why Does SMRT Worry Us?
- Annual sales declines of 16.6% for the past two years show its products and services struggled to connect with the market during this cycle
- Historically negative EPS is a worrisome sign for conservative investors and obscures its long-term earnings potential
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
SmartRent’s stock price of $1.19 implies a valuation ratio of 30.2x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why SMRT doesn’t pass our bar.
Packaging Corporation of America (PKG)
Market Cap: $20.3 billion
Founded in 1959, Packaging Corporation of America (NYSE: PKG) produces containerboard and corrugated packaging products as well as displays and package protection.
Why Are We Hesitant About PKG?
- Weak unit sales over the past two years imply it may need to invest in improvements to get back on track
- Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term
- Eroding returns on capital suggest its historical profit centers are aging
Packaging Corporation of America is trading at $229.40 per share, or 19.9x forward P/E. Dive into our free research report to see why there are better opportunities than PKG.
Avery Dennison (AVY)
Market Cap: $12.93 billion
Founded as Kum Kleen Products, Avery Dennison (NYSE: AVY) is a manufacturer of adhesive materials, display graphics, and packaging products, serving various industries.
Why Does AVY Give Us Pause?
- Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
- Estimated sales growth of 2.3% for the next 12 months is soft and implies weaker demand
- Earnings per share lagged its peers over the last five years as they only grew by 2.9% annually
At $170.69 per share, Avery Dennison trades at 16.3x forward P/E. To fully understand why you should be careful with AVY, check out our full research report (it’s free).
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