Whether you see them or not, industrials businesses play a crucial part in our daily activities. But they are at the whim of volatile macroeconomic factors that influence capital spending (like interest rates), and the market seems convinced that demand will slow. Due to this bearish outlook, the industry has tumbled by 7.9% over the past six months. This performance is a far cry from the S&P 500’s 7.2% ascent.
Some companies can grow regardless of the economic backdrop, but the odds aren’t great for the ones we’re analyzing today. Taking that into account, here are three industrials stocks we’re steering clear of.
Builders FirstSource (BLDR)
Market cap: $6.98 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 Avoid BLDR?
- Annual sales declines of 4.2% for the past five years show its products and services struggled to connect with the market during this cycle
- Free cash flow margin dropped by 12.1 percentage points over the last five years, implying the company became more capital intensive as competition picked up
- Eroding returns on capital suggest its historical profit centers are aging
Builders FirstSource is trading at $64.81 per share, or 22.8x forward P/E. Check out our free in-depth research report to learn more about why BLDR doesn’t pass our bar.
Graco (GGG)
Market cap: $10.82 billion
Founded in 1926, Graco (NYSE: GGG) is an industrial company specializing in the development and manufacturing of fluid-handling systems and products.
Why Are We Hesitant About GGG?
- Muted 3.8% annual revenue growth over the last five years shows its demand lagged behind its industrials peers
- Earnings growth over the last two years fell short of the peer group average as its EPS only increased by 3.7% annually
- Waning returns on capital imply its previous profit engines are losing steam
At $67.50 per share, Graco trades at 20.1x forward P/E. To fully understand why you should be careful with GGG, check out our full research report (it’s free).
United Parcel Service (UPS)
Market cap: $92.1 billion
Trademarking its recognizable UPS Brown color, UPS (NYSE: UPS) offers package delivery, supply chain management, and freight forwarding services.
Why Are We Out on UPS?
- Products and services are facing end-market challenges during this cycle, as seen in its flat sales over the last five years
- Performance over the past five years shows each sale was less profitable, as its earnings per share fell by 9.2% annually
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
United Parcel Service’s stock price of $108.14 implies a valuation ratio of 13.5x forward P/E. If you’re considering UPS for your portfolio, see our FREE research report to learn more.
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