In This Article:
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 10.4%. This drop was worse than the S&P 500’s 2% decline.
Investors should tread carefully as timing cyclical companies is a challenging task, and any misstep can have you catching a falling knife. Keeping that in mind, here are three industrials stocks we’re steering clear of.
Deere (DE)
Market Cap: $130.3 billion
Revolutionizing agriculture with the first self-polishing cast-steel plow in the 1800s, Deere (NYSE:DE) manufactures and distributes advanced agricultural, construction, forestry, and turf care equipment.
Why Do We Avoid DE?
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Products and services are facing significant end-market challenges during this cycle as sales have declined by 6.2% annually over the last two years
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7.1 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
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6× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
At $480.90 per share, Deere trades at 23.8x forward P/E. To fully understand why you should be careful with DE, check out our full research report (it’s free).
Otis (OTIS)
Market Cap: $38.04 billion
Credited with inventing the first hydraulic passenger elevator, Otis Worldwide (NYSE:OTIS) is an elevator and escalator manufacturing, installation and service company.
Why Does OTIS Give Us Pause?
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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
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Estimated sales growth of 3.9% for the next 12 months is soft and implies weaker demand
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2.8 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
Otis’s stock price of $96.39 implies a valuation ratio of 23x forward P/E. Read our free research report to see why you should think twice about including OTIS in your portfolio, it’s free.
Ducommun (DCO)
Market Cap: $863.7 million
California’s oldest company, Ducommun (NYSE:DCO) is a provider of engineering and manufacturing services for high-performance products primarily within the aerospace and defense industries.
Why Do We Think DCO Will Underperform?
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New orders were hard to come by as its average backlog growth of 4.9% over the past two years underwhelmed
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Performance over the past two years was negatively impacted by new share issuances as its earnings per share were flat while its revenue grew
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ROIC of 4.6% reflects management’s challenges in identifying attractive investment opportunities