Whether you see them or not, industrials businesses play a crucial part in our daily activities. But their prominence also brings high exposure to the ups and downs of economic cycles. Luckily, the tide is turning in their favor as the industry’s 20.5% return over the past six months has topped the S&P 500 by 13.8 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. Taking that into account, here are three industrials stocks we’re steering clear of.
Matson (MATX)
Market Cap: $6.02 billion
Founded by a Swedish orphan, Matson (NYSE: MATX) is a provider of ocean transportation and logistics services.
Why Are We Wary of MATX?
- 3.3% annual revenue growth over the last two years was slower than its industrials peers
- Free cash flow margin dropped by 13.2 percentage points over the last five years, implying the company became more capital intensive as competition picked up
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
At $194.46 per share, Matson trades at 14x forward P/E. Check out our free in-depth research report to learn more about why MATX doesn’t pass our bar.
3M (MMM)
Market Cap: $82.36 billion
Producers of the first asthma inhaler, 3M Company (NYSE: MMM) is a global conglomerate known for products in industries like healthcare, safety, electronics, and consumer goods.
Why Should You Sell MMM?
- 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
- Anticipated sales growth of 3.2% for the next year implies demand will be shaky
- Earnings per share have contracted by 2.3% annually over the last five years, a headwind for returns as stock prices often echo long-term EPS performance
3M’s stock price of $164.31 implies a valuation ratio of 19.2x forward P/E. Read our free research report to see why you should think twice about including MMM in your portfolio.
Taylor Morrison Home (TMHC)
Market Cap: $6.72 billion
Named “America’s Most Trusted Home Builder” in 2019, Taylor Morrison Home (NYSE: TMHC) builds single family homes and communities across the United States.
Why Are We Out on TMHC?
- Product roadmap and go-to-market strategy need to be reconsidered as its backlog has averaged 33.2% declines over the past two years
- Forecasted revenue decline of 12.9% for the upcoming 12 months implies demand will fall off a cliff
- Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term
Taylor Morrison Home is trading at $72.10 per share, or 13.2x forward P/E. Dive into our free research report to see why there are better opportunities than TMHC.
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