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 3%. This drop is a far cry from the S&P 500’s 12.3% ascent.
Investors should tread carefully as timing cyclical companies is a challenging task, and any misstep can have you catching a falling knife. On that note, here are three industrials stocks we’re passing on.
Tecnoglass (TGLS)
Market Cap: $1.78 billion
The first-ever Colombian company to trade on the NASDAQ, Tecnoglass (NYSE: TGLS) is a manufacturer of architectural glass, windows, and aluminum products.
Why Do We Think Twice About TGLS?
- Incremental sales over the last two years were much less profitable as its earnings per share fell by 5.5% annually while its revenue grew
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 11.5 percentage points
- Eroding returns on capital suggest its historical profit centers are aging
Tecnoglass’s stock price of $39.85 implies a valuation ratio of 14.5x forward P/E. Dive into our free research report to see why there are better opportunities than TGLS.
Quanex (NX)
Market Cap: $883.3 million
Starting in the seamless tube industry, Quanex (NYSE: NX) manufactures building products like window, door, kitchen, and bath cabinet components.
Why Does NX Worry Us?
- Expenses have increased as a percentage of revenue over the last five years as its operating margin fell by 19.5 percentage points
- Earnings per share fell by 20.1% annually over the last two years while its revenue grew, partly because it diluted shareholders
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
At $19.43 per share, Quanex trades at 10.4x forward P/E. If you’re considering NX for your portfolio, see our FREE research report to learn more.
Schneider (SNDR)
Market Cap: $6.04 billion
Employing thousands of drivers across the country to make deliveries, Schneider (NYSE: SNDR) makes full truckload and intermodal deliveries regionally and across borders.
Why Are We Bearish on SNDR?
- 3.1% annual revenue growth over the last five years was slower than its industrials peers
- Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 16.6% annually
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Schneider is trading at $34.44 per share, or 25.9x forward P/E. Check out our free in-depth research report to learn more about why SNDR doesn’t pass our bar.
Stocks We Like More
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