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 11.2%. This performance was worse than the S&P 500’s 2.5% fall.
A cautious approach is imperative when dabbling in these companies as the losers can be left for dead when the cycle naturally turns and the winners consolidate. Keeping that in mind, here are three industrials stocks we’re passing on.
EnerSys (ENS)
Market Cap: $3.26 billion
Supplying batteries that power equipment as big as mining rigs, EnerSys (NYSE: ENS) manufactures various kinds of batteries for a range of industries.
Why Are We Wary of ENS?
- Declining unit sales over the past two years show it’s struggled to increase its sales volumes and had to rely on price increases
- Estimated sales growth of 1.6% for the next 12 months is soft and implies weaker demand
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 5.8 percentage points
At $84.64 per share, EnerSys trades at 8.1x forward P/E. If you’re considering ENS for your portfolio, see our FREE research report to learn more.
Knight-Swift Transportation (KNX)
Market Cap: $7.09 billion
Covering 1.6 billion loaded miles in 2023 alone, Knight-Swift Transportation (NYSE: KNX) offers less-than-truckload and full truckload delivery services.
Why Are We Out on KNX?
- 1.2% annual revenue growth over the last two years was slower than its industrials peers
- Free cash flow margin shrank by 9.5 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Knight-Swift Transportation is trading at $44.47 per share, or 22.3x forward P/E. Read our free research report to see why you should think twice about including KNX in your portfolio.
Johnson Controls (JCI)
Market Cap: $66.79 billion
Founded after patenting the electric room thermostat, Johnson Controls (NYSE: JCI) specializes in building products and technology solutions, including HVAC systems, fire and security systems, and energy storage.
Why Do We Think JCI Will Underperform?
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Anticipated sales growth of 3.8% for the next year implies demand will be shaky
- ROIC of 6.6% reflects management’s challenges in identifying attractive investment opportunities
Johnson Controls’s stock price of $103.53 implies a valuation ratio of 26.3x forward P/E. Dive into our free research report to see why there are better opportunities than JCI.
Stocks We Like More
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