Even if they go mostly unnoticed, industrial businesses are the backbone of our country. Still, their generally high capital requirements expose them to the ups and downs of economic cycles, and the market seems to be baking in a prolonged downturn as the industry has shed 2.9% over the past six months. This drop is a stark contrast from the S&P 500’s 12% gain.
A cautious approach is imperative when dabbling in these companies as the losers can be left for dead when the cycle naturally turns and the winners consolidate. Keeping that in mind, here are three industrials stocks that may face trouble.
Resideo (REZI)
Market Cap: $2.94 billion
Resideo Technologies, Inc. (NYSE: REZI) is a manufacturer and distributor of technology-driven products and solutions for home comfort, energy management, water management, and safety and security.
Why Are We Out on REZI?
- 5.8% annual revenue growth over the last five years was slower than its industrials peers
- Free cash flow margin shrank by 20.6 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
Resideo is trading at $19.40 per share, or 10.3x forward P/E. To fully understand why you should be careful with REZI, check out our full research report (it’s free).
United Parcel Service (UPS)
Market Cap: $87.64 billion
Trademarking its recognizable UPS Brown color, UPS (NYSE:UPS) offers package delivery, supply chain management, and freight forwarding services.
Why Do We Pass on UPS?
- Sales were flat over the last five years, indicating it’s failed to expand this cycle
- Earnings per share fell by 8.4% annually over the last five years while its revenue was flat, showing each sale was less profitable
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
At $103.07 per share, United Parcel Service trades at 13.2x forward P/E. Dive into our free research report to see why there are better opportunities than UPS.
Viavi Solutions (VIAV)
Market Cap: $8.51 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 Fall Short?
- Muted 4.8% annual revenue growth over the last five years shows its demand lagged behind its industrials peers
- Day-to-day expenses have swelled relative to revenue over the last five years as its operating margin fell by 7.4 percentage points
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
Viavi Solutions’s stock price of $34.50 implies a valuation ratio of 21.2x forward P/E. Read our free research report to see why you should think twice about including VIAV in your portfolio.
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