Whether you see them or not, industrials businesses play a crucial part in our daily activities. Their momentum is also rising as lower interest rates have incentivized higher capital spending. As a result, the industry has posted a 13.6% gain over the past six months, beating the S&P 500 by 3.6 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. With that said, here is one industrials stock poised to generate sustainable market-beating returns and two we’re passing on.
Two Industrials Stocks to Sell:
Heartland Express (HTLD)
Market Cap: $762.1 million
Founded by the son of a trucker, Heartland Express (NASDAQ: HTLD) offers full-truckload deliveries across the United States and Mexico.
Why Do We Avoid HTLD?
- Sales tumbled by 17.8% annually over the last two years, showing market trends are working against its favor during this cycle
- 19.5 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
Heartland Express’s stock price of $10 implies a valuation ratio of 0.9x forward price-to-sales. If you’re considering HTLD for your portfolio, see our FREE research report to learn more.
Sunrun (RUN)
Market Cap: $4.25 billion
Helping homeowners use solar energy to power their homes, Sunrun (NASDAQ: RUN) provides residential solar electricity, specializing in panel installation and leasing services.
Why Are We Hesitant About RUN?
- Flat sales over the last two years suggest it must find different ways to grow during this cycle
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
At $18.33 per share, Sunrun trades at 31.9x forward P/E. Check out our free in-depth research report to learn more about why RUN doesn’t pass our bar.
One Industrials Stock to Buy:
ESCO (ESE)
Market Cap: $5.22 billion
A developer of the communication systems used in the Batmobile of “The Dark Knight,” ESCO (NYSE: ESE) is a provider of engineered components for the aerospace, defense, and utility sectors.
Why Will ESE Outperform?
- Demand is greater than supply as the company’s 29% average backlog growth over the past two years shows it’s securing new contracts and accumulating more orders than it can fulfill
- Operating margin expanded by 4.3 percentage points over the last five years as it scaled and became more efficient
- Performance over the past two years shows its incremental sales were extremely profitable, as its annual earnings per share growth of 30.9% outpaced its revenue gains
ESCO is trading at $202.10 per share, or 25.6x forward P/E. Is now a good time to buy? Find out in our full research report, it’s free for active Edge members.
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