Whether you see them or not, industrials businesses play a crucial part in our daily activities. Their momentum is also rising as lower interest rates have incentivized higher capital spending. As a result, the industry has posted a 15.5% gain over the past six months, beating the S&P 500 by 11.9 percentage points.
Although these companies have produced results lately, a cautious approach is imperative. When the cycle naturally turns, the losers can be left for dead while the winners consolidate and take more of the market. With that said, here are three industrials stocks best left ignored.
AeroVironment (AVAV)
Market Cap: $8.95 billion
Focused on the future of autonomous military combat, AeroVironment (NASDAQ: AVAV) specializes in advanced unmanned aircraft systems and electric vehicle charging solutions.
Why Are We Wary of AVAV?
- Efficiency has decreased over the last five years as its operating margin fell by 15.3 percentage points
- Earnings per share fell by 8.4% annually over the last two years while its revenue grew, showing its incremental sales were much less profitable
- 6.3 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
At $177.25 per share, AeroVironment trades at 47.9x forward P/E. If you’re considering AVAV for your portfolio, see our FREE research report to learn more.
Commercial Vehicle Group (CVGI)
Market Cap: $136.6 million
Formed from a partnership between two distinct companies, CVG (NASDAQ: CVGI) offers various components used in vehicles and systems used in warehouses.
Why Should You Sell CVGI?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 2% annually over the last five years
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
- 6× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
Commercial Vehicle Group’s stock price of $4.03 implies a valuation ratio of 9.4x forward EV-to-EBITDA. To fully understand why you should be careful with CVGI, check out our full research report (it’s free).
Rivian (RIVN)
Market Cap: $18.91 billion
The manufacturer of Amazon’s delivery trucks, Rivian (NASDAQ: RIVN) designs, manufactures, and sells electric vehicles and commercial delivery vans.
Why Do We Think Twice About RIVN?
- Declining vehicles delivered suggest it might need to invest in product improvements to get back on track
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
- Negative earnings profile makes it challenging to secure favorable financing terms from lenders
Rivian is trading at $15.22 per share, or 2.6x forward price-to-sales. Read our free research report to see why you should think twice about including RIVN in your portfolio.
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