Whether you see them or not, industrials businesses play a crucial part in our daily activities. Still, their generally high capital requirements expose them to the ups and downs of economic cycles, and the industry’s six-month return of 3.1% has fallen short of the S&P 500’s 16.8% rise.
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.
Alamo (ALG)
Market Cap: $1.98 billion
Expanding its markets through acquisitions since its founding, Alamo (NYSE: ALG) designs, manufactures, and services vegetation management and infrastructure maintenance equipment for governmental, industrial, and agricultural use.
Why Are We Wary of ALG?
- Flat sales over the last two years suggest it must find different ways to grow during this cycle
- Estimated sales growth of 4.2% for the next 12 months is soft and implies weaker demand
- Earnings per share have dipped by 5.6% annually over the past two years, which is concerning because stock prices follow EPS over the long term
Alamo is trading at $162.53 per share, or 14.5x forward P/E. Read our free research report to see why you should think twice about including ALG in your portfolio.
AECOM (ACM)
Market Cap: $7.68 billion
Founded in 1990 when a group of engineers from five companies decided to merge, AECOM (NYSE: ACM) provides various infrastructure consulting services.
Why Are We Bearish on ACM?
- New orders were hard to come by as its backlog was flat over the past two years
- Sales were less profitable over the last two years as its earnings per share fell by 6.3% annually, worse than its revenue declines
- Free cash flow margin shrank by 3.5 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
At $60.30 per share, AECOM trades at 9.7x forward P/E. To fully understand why you should be careful with ACM, check out our full research report (it’s free).
Stanley Black & Decker (SWK)
Market Cap: $13.54 billion
With an iconic “STANLEY” logo which has remained virtually unchanged for over a century, Stanley Black & Decker (NYSE: SWK) is a manufacturer primarily catering to the tool and outdoor equipment industry.
Why Do We Steer Clear of SWK?
- Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
- Sales are projected to be flat over the next 12 months and imply weak demand
- Falling earnings per share over the last five years has some investors worried as stock prices ultimately follow EPS over the long term
Stanley Black & Decker’s stock price of $89.68 implies a valuation ratio of 15.7x forward P/E. If you’re considering SWK for your portfolio, see our FREE research report to learn more.
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