Even if they go mostly unnoticed, industrial businesses are the backbone of our country. Unfortunately, this role also comes with a demand profile tethered to the ebbs and flows of the broader economy, and investors seem to be forecasting a downturn - over the past six months, the industry has pulled back by 1.4%. This drawdown was disheartening since the S&P 500 gained 1.9%.
Some companies can grow regardless of the economic backdrop, but the odds aren’t great for the ones we’re analyzing today. Taking that into account, here are three industrials stocks we’re steering clear of.
Carrier Global (CARR)
Market Cap: $59.59 billion
Founded by the inventor of air conditioning, Carrier Global (NYSE: CARR) manufactures heating, ventilation, air conditioning, and refrigeration products.
Why Do We Think Twice About CARR?
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Free cash flow margin dropped by 5.9 percentage points over the last five years, implying the company became more capital intensive as competition picked up
- Diminishing returns on capital suggest its earlier profit pools are drying up
Carrier Global’s stock price of $69.80 implies a valuation ratio of 22.8x forward P/E. Read our free research report to see why you should think twice about including CARR in your portfolio.
Ford (F)
Market Cap: $41.48 billion
Established to make automobiles accessible to a broader segment of the population, Ford (NYSE: F) designs, manufactures, and sells a variety of automobiles, trucks, and electric vehicles.
Why Do We Avoid F?
- Flat vehicles sold over the past two years suggest it might have to lower prices to accelerate growth
- 13.4 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
- High net-debt-to-EBITDA ratio of 8× increases the risk of forced asset sales or dilutive financing if operational performance weakens
Ford is trading at $10.42 per share, or 7.7x forward P/E. To fully understand why you should be careful with F, check out our full research report (it’s free).
FARO (FARO)
Market Cap: $845.7 million
Launched by two PhD students in a garage, FARO (NASDAQ: FARO) provides 3D measurement and imaging systems for the manufacturing, construction, engineering, and public safety industries.
Why Does FARO Worry Us?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 1.5% annually over the last five years
- Poor expense management has led to operating margin losses
- Cash burn makes us question whether it can achieve sustainable long-term growth
At $43.70 per share, FARO trades at 39.4x forward P/E. If you’re considering FARO for your portfolio, see our FREE research report to learn more.
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