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 20.6% gain over the past six months, beating the S&P 500 by 14.4 percentage points.
Regardless of these results, investors should tread carefully. The diversity of companies in this space means that not all are created equal or well-positioned for the inescapable downturn. Keeping that in mind, here are three industrials stocks that may face trouble.
Saia (SAIA)
Market Cap: $12.96 billion
Pivoting its business model after realizing there was more success in delivering produce than selling it, Saia (NASDAQ: SAIA) is a provider of freight transportation solutions.
Why Is SAIA Not Exciting?
- Disappointing tons shipped over the past two years suggest it might have to lower prices to accelerate growth
- Poor free cash flow margin of -0.1% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
- Eroding returns on capital suggest its historical profit centers are aging
At $433.86 per share, Saia trades at 34.8x forward P/E. Dive into our free research report to see why there are better opportunities than SAIA.
MSC Industrial (MSM)
Market Cap: $6.45 billion
Founded in NYC’s Little Italy, MSC Industrial Direct (NYSE: MSM) provides industrial supplies and equipment, offering vast and reliable selection for customers such as contractors
Why Do We Think MSM Will Underperform?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 1.9% annually over the last two years
- Falling earnings per share over the last five 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
MSC Industrial’s stock price of $120.13 implies a valuation ratio of 25x forward P/E. Read our free research report to see why you should think twice about including MSM in your portfolio.
Belden (BDC)
Market Cap: $4.37 billion
With its enamel-coated copper wire used in WWI for the Allied forces, Belden (NYSE: BDC) designs, manufactures, and sells electronic components to various industries.
Why Are We Hesitant About BDC?
- Operating margin was unchanged over the last five years, suggesting it failed to gain leverage on its fixed costs
- Free cash flow margin didn’t grow over the last five years
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
Belden is trading at $123.90 per share, or 14.4x forward P/E. To fully understand why you should be careful with BDC, check out our full research report (it’s free).
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