Industrials businesses quietly power the physical things we depend on, from cars and homes to e-commerce infrastructure. 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 5.6%. This drawdown was discouraging since the S&P 500 stood firm.
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. On that note, here are three industrials stocks that may face trouble.
Custom Truck One Source (CTOS)
Market Cap: $1.07 billion
Inspired by a family gas station, Custom Truck One Source (NYSE: CTOS) is a distributor of trucks and heavy equipment.
Why Do We Avoid CTOS?
- Annual revenue growth of 4.6% over the last two years was below our standards for the industrials sector
- Free cash flow margin shrank by 29.2 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
- Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders
Custom Truck One Source’s stock price of $4.72 implies a valuation ratio of 64.3x forward P/E. Check out our free in-depth research report to learn more about why CTOS doesn’t pass our bar.
Zurn Elkay (ZWS)
Market Cap: $6.06 billion
Claiming to have saved more than 30 billion gallons of water, Zurn Elkay (NYSE: ZWS) provides water management solutions to various industries.
Why Does ZWS Give Us Pause?
- 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
- Estimated sales growth of 3.5% for the next 12 months implies demand will slow from its two-year trend
- Performance over the past five years was negatively impacted by new share issuances as its earnings per share dropped by 8.4% annually, worse than its revenue
At $36.04 per share, Zurn Elkay trades at 26.5x forward P/E. Read our free research report to see why you should think twice about including ZWS in your portfolio.
REV Group (REVG)
Market Cap: $2.20 billion
Offering the first full-electric North American fire truck, REV (NYSE: REVG) manufactures and sells specialty vehicles.
Why Does REVG Fall Short?
- Sales stagnated over the last five years and signal the need for new growth strategies
- Competitive supply chain dynamics and steep production costs are reflected in its low gross margin of 12%
- Operating margin of 3% falls short of the industry average, and the smaller profit dollars make it harder to react to unexpected market developments
REV Group is trading at $45.04 per share, or 16.1x forward P/E. To fully understand why you should be careful with REVG, check out our full research report (it’s free).
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