Industrials businesses quietly power the physical things we depend on, from cars and homes to e-commerce infrastructure. Unfortunately, this role also comes with a demand profile tethered to the ebbs and flows of the broader economy, and investors seem to be forecasting a downturn - over the past six months, the industry has pulled back by 6.4%. This drop is a noticeable divergence from the S&P 500’s 13.5% return.
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 we would avoid.
Oshkosh (OSK)
Market Cap: $7.82 billion
Oshkosh (NYSE:OSK) manufactures specialty vehicles for the defense, fire, emergency, and commercial industry, operating various brand subsidiaries within each industry.
Why Do We Think Twice About OSK?
- Backlog has dropped by 3.3% on average over the past two years, suggesting it’s losing orders as competition picks up
- Gross margin of 16.3% is below its competitors, leaving less money to invest in areas like marketing and R&D
- Earnings per share have dipped by 11.9% annually over the past two years, which is concerning because stock prices follow EPS over the long term
Oshkosh’s stock price of $126.64 implies a valuation ratio of 9.8x forward P/E. To fully understand why you should be careful with OSK, check out our full research report (it’s free).
Hillman (HLMN)
Market Cap: $1.38 billion
Established when Max Hillman purchased a franchise operation, Hillman (NASDAQ:HLMN) designs, manufactures, and sells industrial equipment and systems for various sectors.
Why Does HLMN Give Us Pause?
- Annual revenue growth of 2.1% over the last five years was below our standards for the industrials sector
- Responsiveness to unforeseen market trends is restricted due to its substandard operating margin profitability
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
Hillman is trading at $7.11 per share, or 10.7x forward P/E. If you’re considering HLMN for your portfolio, see our FREE research report to learn more.
The Toro Company (TTC)
Market Cap: $9.15 billion
Ceasing all production to support the war effort during World War II, Toro (NYSE:TTC) offers outdoor equipment for residential, commercial, and agricultural use.
Why Does TTC Worry Us?
- Annual revenue growth of 2.9% over the last two years was below our standards for the industrials sector
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 3%
- Diminishing returns on capital suggest its earlier profit pools are drying up
At $96.65 per share, The Toro Company trades at 19.4x forward P/E. Check out our free in-depth research report to learn more about why TTC doesn’t pass our bar.
Stocks We Like More
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