3 Industrials Stocks with Warning Signs

Industrials businesses quietly power the physical things we depend on, from cars and homes to e-commerce infrastructure. 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 23.9% for the sector - higher than the S&P 500’s 15.7% return.

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 best left ignored.

Greenbrier (GBX)

Market Cap: $1.43 billion

Having designed the industry’s first double-decker railcar in the 1980s, Greenbrier (NYSE:GBX) supplies the freight rail transportation industry with railcars and related services.

Why Does GBX Fall Short?

1. Products and services are facing significant end-market challenges during this cycle as sales have declined by 4.5% annually over the last two years
2. Gross margin of 13.5% reflects its high production costs
3. Cash-burning history makes us doubt the long-term viability of its business model

At $46.46 per share, Greenbrier trades at 4.9x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than GBX.

Ducommun (DCO)

Market Cap: $1.36 billion

California’s oldest company, Ducommun (NYSE:DCO) is a provider of engineering and manufacturing services for high-performance products primarily within the aerospace and defense industries.

Why Do We Think Twice About DCO?

1. New orders were hard to come by as its average backlog growth of 3.8% over the past two years underwhelmed
2. Low free cash flow margin of 1.4% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
3. Below-average returns on capital indicate management struggled to find compelling investment opportunities

Ducommun’s stock price of $91.35 implies a valuation ratio of 22.5x forward P/E. If you’re considering DCO for your portfolio, see our FREE research report to learn more.

Kennametal (KMT)

Market Cap: $1.63 billion

Involved in manufacturing hard tips of anti-tank projectiles in World War II, Kennametal (NYSE:KMT) is a provider of industrial materials and tools for various sectors.

Why Do We Think KMT Will Underperform?

1. Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
2. Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 1.4%
3. Earnings per share have contracted by 5.4% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance

Kennametal is trading at $21.42 per share, or 14.6x forward P/E. Read our free research report to see why you should think twice about including KMT in your portfolio.

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