Industrials businesses quietly power the physical things we depend on, from cars and homes to e-commerce infrastructure. They are also bound to benefit from a friendlier regulatory environment with the Trump administration, and this excitement has led to a six-month gain of 16.3% for the sector - higher than the S&P 500’s 8% return.
Nevertheless, investors must be mindful as the cycle can unexpectedly turn. When this inevitably happens, only the elite companies will survive and ultimately thrive. With that said, here are three industrials stocks we’re swiping left on.
Mayville Engineering (MEC)
Market Cap: $921.4 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 Fall Short?
- Sales tumbled by 4.3% annually over the last two years, showing market trends are working against it during this cycle
- Earnings per share have dipped by 42.7% annually over the past two years, which is concerning because stock prices follow EPS over the long term
- 5× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
Mayville Engineering’s stock price of $34.44 implies a valuation ratio of 70.4x forward P/E. Read our free research report to see why you should think twice about including MEC in your portfolio.
Illinois Tool Works (ITW)
Market Cap: $73.21 billion
Founded by Byron Smith, an investor who held over 100 patents, Illinois Tool Works (NYSE: ITW) manufactures engineered components and specialized equipment for numerous industries.
Why Are We Cautious About ITW?
- 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
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 3.2%
- Earnings per share lagged its peers over the last two years as they only grew by 3.1% annually
Illinois Tool Works is trading at $274.31 per share, or 24x forward P/E. If you’re considering ITW for your portfolio, see our FREE research report to learn more.
Itron (ITRI)
Market Cap: $3.58 billion
Founded by a small group of engineers who wanted to build a more efficient way to read utility meters, Itron (NASDAQ: ITRI) offers energy and water management products for the utility industry, municipalities, and industrial customers.
Why Are We Wary of ITRI?
- Sales trends were unexciting over the last two years as its 1.4% annual growth was below the typical industrials company
- Anticipated sales growth of 2.4% for the next year implies demand will be shaky
- Underwhelming 6.5% return on capital reflects management’s difficulties in finding profitable growth opportunities
At $85.50 per share, Itron trades at 14.3x forward P/E. Check out our free in-depth research report to learn more about why ITRI doesn’t pass our bar.
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