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 22% return over the past six months has topped the S&P 500 by 11.7 percentage points.
Although these companies have produced results lately, a cautious approach is imperative. When the cycle naturally turns, the losers can be left for dead while the winners consolidate and take more of the market. On that note, here are three industrials stocks best left ignored.
Trex (TREX)
Market Cap: $4.40 billion
Addressing the demand for aesthetically-pleasing and unique outdoor living spaces, Trex Company (NYSE: TREX) makes wood-alternative decking, railing, and patio furniture.
Why Do We Avoid TREX?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 2.1% annually over the last two years
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 8 percentage points
- Eroding returns on capital suggest its historical profit centers are aging
Trex’s stock price of $42.13 implies a valuation ratio of 24.9x forward P/E. If you’re considering TREX for your portfolio, see our FREE research report to learn more.
Fortive (FTV)
Market Cap: $18.04 billion
Taking its name from the Latin root of "strong", Fortive (NYSE: FTV) manufactures products and develops industrial software for numerous industries.
Why Should You Dump FTV?
- Sales tumbled by 2.4% annually over the last five years, showing market trends are working against it during this cycle
- Flat earnings per share over the last five years underperformed the sector average
- Low returns on capital reflect management’s struggle to allocate funds effectively, and its decreasing returns suggest its historical profit centers are aging
Fortive is trading at $59.28 per share, or 19.7x forward P/E. To fully understand why you should be careful with FTV, check out our full research report (it’s free).
Viavi Solutions (VIAV)
Market Cap: $11.88 billion
Once known as JDS Uniphase before its 2015 rebranding, Viavi Solutions (NASDAQ: VIAV) provides testing, monitoring and assurance solutions for telecommunications, cloud, enterprise, military, and other critical networks and infrastructure.
Why Does VIAV Worry Us?
- 3.4% annual revenue growth over the last five years was slower than its industrials peers
- Incremental sales over the last five years were less profitable as its earnings per share were flat while its revenue grew
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
At $48.77 per share, Viavi Solutions trades at 43.3x forward P/E. Dive into our free research report to see why there are better opportunities than VIAV.
Stocks We Like More
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