3 Industrials Stocks with Questionable Fundamentals

Whether you see them or not, industrials businesses play a crucial part in our daily activities. But this role also comes with a demand profile tethered to the ebbs and flows of the broader economy. Thankfully, industrial end markets were stable over the past six months as the industry’s 11.2% gain has nearly mirrored the S&P 500.

Nevertheless, investors must be mindful as the cycle can unexpectedly turn. When this inevitably happens, only the elite companies will survive and ultimately thrive. Taking that into account, here are three industrials stocks we’re swiping left on.

Kadant (KAI)

Market Cap: $2.95 billion

Headquartered in Massachusetts, Kadant (NYSE:KAI) is a global supplier of high-value, critical components and engineered systems used in process industries worldwide.

Why Are We Cautious About KAI?

1. Annual revenue growth of 3.8% over the last two years was below our standards for the industrials sector
2. Performance over the past two years shows its incremental sales were much less profitable, as its earnings per share fell by 3.6% annually
3. Free cash flow margin shrank by 3.7 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive

Kadant is trading at $250.88 per share, or 25.3x forward P/E. If you’re considering KAI for your portfolio, see our FREE research report to learn more.

Sanmina (SANM)

Market Cap: $7.88 billion

Founded in 1980, Sanmina (NASDAQ:SANM) is an electronics manufacturing services company offering end-to-end solutions for various industries.

Why Is SANM Not Exciting?

1. Products and services are facing significant end-market challenges during this cycle as sales have declined by 4.6% annually over the last two years
2. Gross margin of 8.3% is below its competitors, leaving less money to invest in areas like marketing and R&D
3. Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term

At $144.88 per share, Sanmina trades at 15x forward P/E. Dive into our free research report to see why there are better opportunities than SANM.

Kennametal (KMT)

Market Cap: $1.94 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 Should You Sell KMT?

1. Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
2. Earnings per share decreased by more than its revenue over the last two years, showing each sale was less profitable
3. Below-average returns on capital indicate management struggled to find compelling investment opportunities, and its falling returns suggest its earlier profit pools are drying up

Kennametal’s stock price of $25.50 implies a valuation ratio of 17x forward P/E. Read our free research report to see why you should think twice about including KMT in your portfolio.

High-Quality Stocks for All Market Conditions

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