3 Industrials Stocks Walking a Fine Line

Industrials businesses quietly power the physical things we depend on, from cars and homes to e-commerce infrastructure. 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 20.6% over the past six months. This performance was worse than the S&P 500’s 12.8% decline.

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 we’re steering clear of.

Shoals (SHLS)

Market Cap: $524.4 million

Started in Huntsville, Alabama, Shoals (NASDAQ:SHLS) designs and manufactures products that make solar energy systems work more efficiently.

Why Are We Wary of SHLS?

1. New orders were hard to come by as its backlog was flat over the past two years
2. Free cash flow margin dropped by 10.9 percentage points over the last five years, implying the company became more capital intensive as competition picked up
3. Waning returns on capital imply its previous profit engines are losing steam

Shoals’s stock price of $3.04 implies a valuation ratio of 7.1x forward price-to-earnings. Check out our free in-depth research report to learn more about why SHLS doesn’t pass our bar.

Mueller Water Products (MWA)

Market Cap: $3.64 billion

As one of the oldest companies in the water infrastructure industry, Mueller (NYSE:MWA) is a provider of water infrastructure products and flow control systems for various sectors.

Why Does MWA Worry Us?

1. Muted 2.8% annual revenue growth over the last two years shows its demand lagged behind its industrials peers
2. Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
3. Anticipated sales growth of 2.8% for the next year implies demand will be shaky

Mueller Water Products is trading at $22.98 per share, or 19.7x forward price-to-earnings. Read our free research report to see why you should think twice about including MWA in your portfolio.

Ford (F)

Market Cap: $38.1 billion

Established to make automobiles accessible to a broader segment of the population, Ford (NYSE:F) designs, manufactures, and sells a variety of automobiles, trucks, and electric vehicles.

Why Do We Think F Will Underperform?

1. Underwhelming vehicles sold over the past two years suggest it might have to lower prices to accelerate growth
2. Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 10.9 percentage points
3. 7× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings

At $9.37 per share, Ford trades at 5.8x forward price-to-earnings. To fully understand why you should be careful with F, check out our full research report (it’s free).

Stocks We Like More

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