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, their overall demand was steady over the past six months as the industry’s 11.4% return has closely followed the S&P 500.
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 passing on.
Nordson (NDSN)
Market Cap: $13.46 billion
Founded in 1954, Nordson Corporation (NASDAQ: NDSN) manufactures dispensing equipment and industrial adhesives, sealants and coatings.
Why Are We Cautious About NDSN?
- 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
- Earnings per share lagged its peers over the last two years as they only grew by 2% annually
- Diminishing returns on capital suggest its earlier profit pools are drying up
Nordson’s stock price of $241.05 implies a valuation ratio of 21.4x forward P/E. To fully understand why you should be careful with NDSN, check out our full research report (it’s free for active Edge members).
THOR Industries (THO)
Market Cap: $5.57 billion
Created through the acquisition and merger of various RV manufacturers, THOR Industries manufactures and sells a range of recreational vehicles, including motorhomes and travel trailers, catering to consumers seeking the freedom and comfort of the RV lifestyle.
Why Do We Pass on THO?
- Annual sales declines of 3.3% for the past two years show its products and services struggled to connect with the market during this cycle
- Earnings per share have dipped by 1.2% annually over the past two years, which is concerning because stock prices follow EPS over the long term
- Diminishing returns on capital suggest its earlier profit pools are drying up
THOR Industries is trading at $104.40 per share, or 22.8x forward P/E. If you’re considering THO for your portfolio, see our FREE research report to learn more.
LGI Homes (LGIH)
Market Cap: $962.6 million
Based in Texas, LGI Homes (NASDAQ: LGIH) is a homebuilding company specializing in constructing affordable, entry-level single-family homes in desirable communities across the United States.
Why Is LGIH Risky?
- Sales pipeline suggests its future revenue growth won’t meet our standards as its backlog averaged 10.4% declines over the past two years
- Waning returns on capital imply its previous profit engines are losing steam
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
At $41.73 per share, LGI Homes trades at 11.6x forward P/E. Read our free research report to see why you should think twice about including LGIH in your portfolio.
Stocks We Like More
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