Whether you see them or not, industrials businesses play a crucial part in our daily activities. 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 6.4% over the past six months. This performance is a noticeable divergence from the S&P 500’s 13.5% return.
Some companies can grow regardless of the economic backdrop, but the odds aren’t great for the ones we’re analyzing today. Keeping that in mind, here are three industrials stocks best left ignored.
Shoals (SHLS)
Market Cap: $1.45 billion
Started in Huntsville, Alabama, Shoals (NASDAQ:SHLS) designs and manufactures products that make solar energy systems work more efficiently.
Why Is SHLS Not Exciting?
- Performance over the past two years shows its incremental sales were much less profitable, as its earnings per share fell by 8.5% annually
- Free cash flow margin shrank by 8.3 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
At $8.65 per share, Shoals trades at 16x forward P/E. Read our free research report to see why you should think twice about including SHLS in your portfolio.
Itron (ITRI)
Market Cap: $3.75 billion
Founded by a small group of engineers who wanted to build a more efficient way to read utility meters, Itron (NASDAQ:ITRI) offers energy and water management products for the utility industry, municipalities, and industrial customers.
Why Are We Cautious About ITRI?
- Sales tumbled by 1% annually over the last two years, showing market trends are working against it during this cycle
- Poor expense management has led to an operating margin of 6.8% that is below the industry average
- Low returns on capital reflect management’s struggle to allocate funds effectively
Itron is trading at $85.49 per share, or 13.2x forward P/E. To fully understand why you should be careful with ITRI, check out our full research report (it’s free).
Arrow Electronics (ARW)
Market Cap: $11.49 billion
Founded as a single retail store, Arrow Electronics (NYSE:ARW) provides electronic components and enterprise computing solutions to businesses globally.
Why Are We Hesitant About ARW?
- Scale is a double-edged sword because it limits the company’s growth potential compared to its smaller competitors, as reflected in its below-average annual revenue increases of 1.9% for the last five years
- Competitive supply chain dynamics and steep production costs are reflected in its low gross margin of 12.2%
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
Arrow Electronics’s stock price of $225.63 implies a valuation ratio of 10.3x forward P/E. Check out our free in-depth research report to learn more about why ARW doesn’t pass our bar.
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