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 13.4% over the past six months. This drop is a stark contrast from the S&P 500’s 4.5% gain.
Only some companies are subject to these dynamics, however, and a handful of high-quality businesses can deliver earnings growth in any environment. On that note, here is one industrials stock poised to generate sustainable market-beating returns and two we’re passing on.
Two industrials stocks to sell:
Stratasys (SSYS)
Market cap: $535.2 million
Born from the Founder’s idea of making a toy frog with a glue gun, Stratasys (NASDAQ: SSYS) offers 3D printers and related materials, software, and services to many industries.
Why Are We Wary of SSYS?
- Flat sales over the last five years suggest it must find different ways to grow during this cycle
- Persistent operating margin losses suggest the business manages its expenses poorly
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
Stratasys’s stock price of $6.12 implies a valuation ratio of 48.7x forward P/E. Check out our free in-depth research report to learn more about why SSYS doesn’t pass our bar.
Leonardo DRS (DRS)
Market cap: $8.80 billion
Developing submarine detection systems for the U.S. Navy, Leonardo DRS (NASDAQ: DRS) is a provider of defense systems, electronics, and military support services.
Why Is DRS Not Exciting?
- Demand cratered as it couldn’t win new orders over the past two years, leading to an average 10.5% decline in its backlog
- Day-to-day expenses have swelled relative to revenue over the last five years as its operating margin fell by 9.8 percentage points
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
Leonardo DRS is trading at $32.99 per share, or 23.6x forward P/E. To fully understand why you should be careful with DRS, check out our full research report (it’s free).
One industrials stock to buy:
FuelCell Energy (FCEL)
Market cap: $714 million
Founded in 1969, FuelCell Energy (NASDAQ: FCEL) is a leading manufacturer and developer of carbonate fuel cell technology for stationary power generation.
Why Are We Bullish on FCEL?
- Annual revenue growth of 34.4% over the last two years was superb and indicates its market share increased during this cycle
- Additional sales over the last two years increased its profitability as the 41.4% annual growth in its earnings per share outpaced its revenue
- Cash burn has become less severe over the last five years, showing the company is making some progress toward financial sustainability
At $8.92 per share, FuelCell Energy trades at 3.5x forward price-to-sales. Is now a good time to buy? See for yourself in our comprehensive research report, it’s free.
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