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 11.5% over the past six months. This performance is a noticeable divergence from the S&P 500’s 7.7% return.
Some companies can grow regardless of the economic backdrop, but the odds aren’t great for the ones we’re analyzing today. Keeping that in mind, here are three industrials stocks we would avoid.
PACCAR (PCAR)
Market Cap: $57.07 billion
Founded more than a century ago, PACCAR (NASDAQ:PCAR) designs and manufactures commercial trucks of various weights and sizes for the commercial trucking industry.
Why Does PCAR Give Us Pause?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 11.2% annually over the last two years
- Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
PACCAR is trading at $108.50 per share, or 17x forward P/E. Check out our free in-depth research report to learn more about why PCAR doesn’t pass our bar.
Array (ARRY)
Market Cap: $502.1 million
Going public in October 2020, Array (NASDAQ:ARRY) is a global manufacturer of ground-mounting tracking systems for utility and distributed generation solar energy projects.
Why Is ARRY Risky?
- 3.7% annual revenue growth over the last two years was slower than its industrials peers
- Issuance of new shares over the last five years caused its earnings per share to fall by 3.1% annually while its revenue grew
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
Array’s stock price of $3.23 implies a valuation ratio of 4.4x forward P/E. To fully understand why you should be careful with ARRY, check out our full research report (it’s free).
Masco (MAS)
Market Cap: $14.34 billion
Headquartered just outside of Detroit, MI, Masco (NYSE:MAS) designs and manufactures home-building products such as glass shower doors, decorative lighting, bathtubs, and faucets.
Why Are We Out on MAS?
- Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
- Anticipated sales growth of 1.3% for the next year implies demand will be shaky
- Diminishing returns on capital suggest its earlier profit pools are drying up
At $73.01 per share, Masco trades at 16.7x forward P/E. If you’re considering MAS for your portfolio, see our FREE research report to learn more.
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