Industrials businesses quietly power the physical things we depend on, from cars and homes to e-commerce infrastructure. 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 14.5% return over the past six months has topped the S&P 500 by 7 percentage points.
Nevertheless, investors must be mindful as the cycle can unexpectedly turn. When this inevitably happens, only the elite companies will survive and ultimately thrive. On that note, here is one industrials stock poised to generate sustainable market-beating returns and two we’re passing on.
Two Industrials Stocks to Sell:
Cummins (CMI)
Market Cap: $92.35 billion
With more than half of the heavy-duty truck market using its engines at one point, Cummins (NYSE: CMI) offers engines and power systems.
Why Does CMI Fall Short?
- Products and services are facing end-market challenges during this cycle, as seen in its flat sales over the last two years
- Gross margin of 24.7% is below its competitors, leaving less money to invest in areas like marketing and R&D
- Eroding returns on capital suggest its historical profit centers are aging
Cummins’s stock price of $668.50 implies a valuation ratio of 22.1x forward P/E. Dive into our free research report to see why there are better opportunities than CMI.
Dover (DOV)
Market Cap: $29.76 billion
A company that manufactured critical equipment for the United States military during World War II, Dover (NYSE: DOV) manufactures engineered components and specialized equipment for numerous industries.
Why Does DOV Worry Us?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Earnings growth over the last two years fell short of the peer group average as its EPS only increased by 5.8% annually
- Diminishing returns on capital suggest its earlier profit pools are drying up
At $218.78 per share, Dover trades at 3.4x forward price-to-sales. To fully understand why you should be careful with DOV, check out our full research report (it’s free).
One Industrials Stock to Watch:
Caterpillar (CAT)
Market Cap: $421.3 billion
With its iconic yellow machinery working on construction sites, Caterpillar (NYSE: CAT) manufactures construction equipment like bulldozers, excavators, and parts and maintenance services.
Why Should CAT Be on Your Watchlist?
- Healthy operating margin of 16.9% shows it’s a well-run company with efficient processes, and its rise over the last five years was fueled by some leverage on its fixed costs
- Free cash flow margin expanded by 4.9 percentage points over the last five years, providing additional flexibility for investments and share buybacks/dividends
- Stellar returns on capital showcase management’s ability to surface highly profitable business ventures
Caterpillar is trading at $912.99 per share, or 36.1x forward P/E. Is now a good time to buy? Find out in our full research report, it’s free.
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