Even if they go mostly unnoticed, industrial businesses are the backbone of our country. Still, their generally high capital requirements expose them to the ups and downs of economic cycles, and the market seems to be baking in a prolonged downturn as the industry has shed 1.5% over the past six months. This drawdown is a noticeable divergence from the S&P 500’s 10.9% return.
Investors should tread carefully as timing cyclical companies is a challenging task, and any misstep can have you catching a falling knife. Taking that into account, here are three industrials stocks that may face trouble.
Ingersoll Rand (IR)
Market Cap: $31.24 billion
Started with the invention of the steam drill, Ingersoll Rand (NYSE: IR) provides mission-critical air, gas, liquid, and solid flow creation solutions.
Why Does IR Worry Us?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Earnings growth over the last two years fell short of the peer group average as its EPS only increased by 3.2% annually
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
Ingersoll Rand’s stock price of $80.33 implies a valuation ratio of 21.6x forward P/E. If you’re considering IR for your portfolio, see our FREE research report to learn more.
Dover (DOV)
Market Cap: $27.19 billion
A company that manufactured critical equipment for the United States military during World War II, Dover (NYSE: DOV) manufactures engineered components and specialized equipment for numerous industries.
Why Do We Think Twice About DOV?
- Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
- Earnings per share lagged its peers over the last two years as they only grew by 5.6% annually
- Waning returns on capital imply its previous profit engines are losing steam
Dover is trading at $201.93 per share, or 17.8x forward P/E. To fully understand why you should be careful with DOV, check out our full research report (it’s free).
PulteGroup (PHM)
Market Cap: $24.18 billion
Having delivered over 850,000 homes since its founding in 1950, PulteGroup (NYSE: PHM) is one of America's largest homebuilders, constructing single-family homes, townhouses, and condominiums for first-time, move-up, and active adult buyers across 46 markets in 25 states.
Why Are We Cautious About PHM?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 1.3% annually over the last two years
- Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term
- Diminishing returns on capital suggest its earlier profit pools are drying up
At $129.02 per share, PulteGroup trades at 11.9x forward P/E. Read our free research report to see why you should think twice about including PHM in your portfolio.
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