Industrials businesses quietly power the physical things we depend on, from cars and homes to e-commerce infrastructure. Still, their generally high capital requirements expose them to the ups and downs of economic cycles, and the industry’s six-month return of 6.3% has fallen short of the S&P 500’s 8.6% rise.
Investors should tread carefully as timing cyclical companies is a challenging task, and any misstep can have you catching a falling knife. On that note, here are three industrials stocks that may face trouble.
Lincoln Electric (LECO)
Market Cap: $13.65 billion
Headquartered in Ohio, Lincoln Electric (NASDAQ: LECO) manufactures and sells welding equipment for various industries.
Why Are We Wary of LECO?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Earnings growth underperformed the sector average over the last two years as its EPS grew by just 3.6% annually
- Diminishing returns on capital suggest its earlier profit pools are drying up
At $249.27 per share, Lincoln Electric trades at 22.3x forward P/E. Check out our free in-depth research report to learn more about why LECO doesn’t pass our bar.
Textron (TXT)
Market Cap: $15.95 billion
Listed on the NYSE in 1947, Textron (NYSE: TXT) provides products and services in the aerospace, defense, industrial, and finance sectors.
Why Does TXT Give Us Pause?
- Scale is a double-edged sword because it limits the company’s growth potential compared to its smaller competitors, as reflected in its below-average annual revenue increases of 4.9% for the last two years
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 3.7%
- 4.4 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
Textron is trading at $91.70 per share, or 13.8x forward P/E. If you’re considering TXT for your portfolio, see our FREE research report to learn more.
AECOM (ACM)
Market Cap: $8.67 billion
Founded in 1990 when a group of engineers from five companies decided to merge, AECOM (NYSE: ACM) provides various infrastructure consulting services.
Why Does ACM Worry Us?
- Sales pipeline suggests its future revenue growth won’t meet our standards as its backlog averaged 2% declines over the past two years
- Projected sales growth of 4.1% for the next 12 months suggests sluggish demand
- Free cash flow margin dropped by 3 percentage points over the last five years, implying the company became more capital intensive as competition picked up
AECOM’s stock price of $67.54 implies a valuation ratio of 11.3x forward P/E. Read our free research report to see why you should think twice about including ACM in your portfolio.
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