Industrials businesses quietly power the physical things we depend on, from cars and homes to e-commerce infrastructure. Their momentum is also rising as lower interest rates have incentivized higher capital spending. As a result, the industry has posted a 17.2% gain over the past six months, beating the S&P 500 by 9.2 percentage points.
Nevertheless, investors must be mindful as the cycle can unexpectedly turn. When this inevitably happens, only the elite companies will survive and ultimately thrive. Taking that into account, here are three industrials stocks that may face trouble.
KBR (KBR)
Market Cap: $4.46 billion
Known for projects like the construction of Guantanamo Bay, KBR provides professional services and technologies, specializing in engineering, construction, and government services sectors.
Why Is KBR Not Exciting?
- Product roadmap and go-to-market strategy need to be reconsidered as its backlog has averaged 1.2% declines over the past two years
- Projected sales growth of 6.2% for the next 12 months suggests sluggish demand
- Subpar operating margin of 6.9% constrains its ability to invest in process improvements or effectively respond to new competitive threats
KBR’s stock price of $35.34 implies a valuation ratio of 8.7x forward P/E. To fully understand why you should be careful with KBR, check out our full research report (it’s free).
CACI (CACI)
Market Cap: $11.47 billion
Founded to commercialize SIMSCRIPT, CACI International (NYSE: CACI) offers defense, intelligence, and IT solutions to support national security and government transformation efforts.
Why Does CACI Worry Us?
- Free cash flow margin shrank by 3.9 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
- Returns on capital haven’t budged, indicating management couldn’t drive additional value creation
At $518.06 per share, CACI trades at 17.9x forward P/E. Read our free research report to see why you should think twice about including CACI in your portfolio.
Waste Connections (WCN)
Market Cap: $39.05 billion
Operating a network of municipal solid waste landfills in the U.S. and Canada, Waste Connections (NYSE: WCN) is North America's third-largest waste management company providing collection, disposal, and recycling services.
Why Are We Hesitant About WCN?
- Estimated sales growth of 5.4% for the next 12 months implies demand will slow from its two-year trend
- 2.6 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
- Underwhelming 6.6% return on capital reflects management’s difficulties in finding profitable growth opportunities, and its shrinking returns suggest its past profit sources are losing steam
Waste Connections is trading at $153.73 per share, or 27.6x forward P/E. If you’re considering WCN for your portfolio, see our FREE research report to learn more.
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