3 Industrials Stocks with Warning Signs

Whether you see them or not, industrials businesses play a crucial part in our daily activities. They are also bound to benefit from a friendlier regulatory environment with the Trump administration, and this excitement has led to a six-month gain of 7.5% for the sector - higher than the S&P 500’s 5.5% return.

Although these companies have produced results lately, a cautious approach is imperative. When the cycle naturally turns, the losers can be left for dead while the winners consolidate and take more of the market. Keeping that in mind, here are three industrials stocks we’re steering clear of.

Ryder (R)

Market Cap: $7.43 billion

As one of the first companies to introduce the idea of leasing trucks, Ryder (NYSE:R) provides rental vehicles to businesses and delivers packages directly to homes or businesses.

Why Is R Risky?

1. Annual sales growth of 3% over the last two years lagged behind its industrials peers as its large revenue base made it difficult to generate incremental demand
2. Earnings per share have dipped by 7.4% annually over the past two years, which is concerning because stock prices follow EPS over the long term
3. Free cash flow margin dropped by 9.5 percentage points over the last five years, implying the company became more capital intensive as competition picked up

Ryder’s stock price of $182.11 implies a valuation ratio of 12.9x forward P/E. To fully understand why you should be careful with R, check out our full research report (it’s free).

Gorman-Rupp (GRC)

Market Cap: $1.11 billion

Powering fluid dynamics since 1934, Gorman-Rupp (NYSE:GRC) has evolved from its Ohio origins into a global manufacturer and seller of pumps and pump systems.

Why Does GRC Worry Us?

1. Muted 3.3% annual revenue growth over the last two years shows its demand lagged behind its industrials peers
2. Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 3.7%
3. Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 4.7 percentage points

Gorman-Rupp is trading at $43.59 per share, or 18.9x forward P/E. If you’re considering GRC for your portfolio, see our FREE research report to learn more.

Proto Labs (PRLB)

Market Cap: $1.14 billion

Pioneering the concept of online quoting and manufacturing for custom prototypes and low-volume production parts, Proto Labs (NYSE:PRLB) offers injection molding, 3D printing, and sheet metal fabrication for manufacturers in various industries.

Why Should You Sell PRLB?

1. Annual revenue growth of 2.4% over the last two years was below our standards for the industrials sector
2. Efficiency has decreased over the last five years as its operating margin fell by 7.6 percentage points
3. Earnings per share have contracted by 9.3% annually over the last five years, a headwind for returns as stock prices often echo long-term EPS performance

At $47.85 per share, Proto Labs trades at 32.3x forward P/E. Check out our free in-depth research report to learn more about why PRLB doesn’t pass our bar.

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