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. But their prominence also brings high exposure to the ups and downs of economic cycles. Luckily, the tide is turning in their favor as the industry’s 16.6% return over the past six months has topped the S&P 500 by 2.5 percentage points.

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. With that said, here are three industrials stocks best left ignored.

UFP Industries (UFPI)

Market Cap: $5.38 billion

Beginning as a lumber supplier in the 1950s, UFP Industries (NASDAQ:UFPI) is a holding company making building materials for the construction, retail, and industrial sectors.

Why Do We Think UFPI Will Underperform?

1. Declining unit sales over the past two years indicate demand is soft and that the company may need to revise its strategy
2. Performance over the past two years shows each sale was less profitable as its earnings per share dropped by 20.4% annually, worse than its revenue
3. Eroding returns on capital suggest its historical profit centers are aging

UFP Industries is trading at $90.40 per share, or 16.5x forward P/E. To fully understand why you should be careful with UFPI, check out our full research report (it’s free for active Edge members).

Illinois Tool Works (ITW)

Market Cap: $72.06 billion

Founded by Byron Smith, an investor who held over 100 patents, Illinois Tool Works (NYSE:ITW) manufactures engineered components and specialized equipment for numerous industries.

Why Do We Think Twice About ITW?

1. Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
2. Anticipated sales growth of 3.3% for the next year implies demand will be shaky
3. Flat earnings per share over the last two years underperformed the sector average

Illinois Tool Works’s stock price of $248.32 implies a valuation ratio of 22.5x forward P/E. Dive into our free research report to see why there are better opportunities than ITW.

Silgan Holdings (SLGN)

Market Cap: $4.14 billion

Established in 1987, Silgan Holdings (NYSE:SLGN) is a supplier of rigid packaging for consumer goods products, specializing in metal containers, closures, and plastic packaging.

Why Do We Steer Clear of SLGN?

1. Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
2. High input costs result in an inferior gross margin of 16.8% that must be offset through higher volumes
3. Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 1.5% for the last five years

At $39.21 per share, Silgan Holdings trades at 10.5x forward P/E. Check out our free in-depth research report to learn more about why SLGN doesn’t pass our bar.

Stocks We Like More

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