Whether you see them or not, industrials businesses play a crucial part in our daily activities. Their momentum is also rising as lower interest rates have incentivized higher capital spending. As a result, the industry has posted a 23.7% gain over the past six months, beating the S&P 500 by 13.2 percentage points.
Regardless of these results, investors should tread carefully. The diversity of companies in this space means that not all are created equal or well-positioned for the inescapable downturn. Taking that into account, here are three industrials stocks we’re steering clear of.
Custom Truck One Source (CTOS)
Market Cap: $1.39 billion
Inspired by a family gas station, Custom Truck One Source (NYSE:CTOS) is a distributor of trucks and heavy equipment.
Why Does CTOS Worry Us?
- Muted 4.1% annual revenue growth over the last two years shows its demand lagged behind its industrials peers
- Earnings per share have contracted by 52% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance
- Free cash flow margin dropped by 24.4 percentage points over the last five years, implying the company became more capital intensive as competition picked up
Custom Truck One Source is trading at $6.14 per share, or 63.5x forward P/E. To fully understand why you should be careful with CTOS, check out our full research report (it’s free).
Old Dominion Freight Line (ODFL)
Market Cap: $31.73 billion
With its name deriving from the Commonwealth of Virginia’s nickname, Old Dominion (NASDAQ:ODFL) delivers less-than-truckload (LTL) and full-container load freight.
Why Do We Think Twice About ODFL?
- Declining unit sales over the past two years indicate demand is soft and that the company may need to revise its strategy
- Earnings per share have dipped by 5.5% annually over the past two years, which is concerning because stock prices follow EPS over the long term
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
At $151.78 per share, Old Dominion Freight Line trades at 27.9x forward P/E. If you’re considering ODFL for your portfolio, see our FREE research report to learn more.
Boise Cascade (BCC)
Market Cap: $3.25 billion
Formed through the merger of two lumber companies, Boise Cascade Company (NYSE:BCC) manufactures and distributes wood products and other building materials.
Why Should You Sell BCC?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 4.2% annually over the last two years
- Free cash flow margin shrank by 5.5 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
- Diminishing returns on capital suggest its earlier profit pools are drying up
Boise Cascade’s stock price of $88.20 implies a valuation ratio of 12.8x forward P/E. Read our free research report to see why you should think twice about including BCC in your portfolio.
Stocks We Like More
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