1 Industrials Stock to Research Further and 2 We Turn Down

Even if they go mostly unnoticed, industrial businesses are the backbone of our country. Their momentum is also rising as lower interest rates have incentivized higher capital spending. As a result, the industry has posted a 16.7% gain over the past six months, beating the S&P 500 by 3.1 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. On that note, here is one resilient industrials stock at the top of our wish list and two we’re swiping left on.

Two Industrials Stocks to Sell:

Littelfuse (LFUS)

Market Cap: $6.26 billion

The developer of the first blade-type automotive fuse, Littelfuse (NASDAQ:LFUS) provides electrical protection and control components for the automotive, industrial, electronics, and telecommunications industries.

Why Does LFUS Give Us Pause?

1. Products and services are facing significant end-market challenges during this cycle as sales have declined by 2.5% annually over the last two years
2. Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term
3. Eroding returns on capital suggest its historical profit centers are aging

At $251.35 per share, Littelfuse trades at 21x forward P/E. Dive into our free research report to see why there are better opportunities than LFUS.

International Paper (IP)

Market Cap: $20.43 billion

Established in 1898, International Paper (NYSE:IP) produces containerboard, pulp, paper, and materials used in packaging and printing applications.

Why Do We Pass on IP?

1. Sizable revenue base leads to growth challenges as its 2.4% annual revenue increases over the last five years fell short of other industrials companies
2. Free cash flow margin dropped by 11.5 percentage points over the last five years, implying the company became more capital intensive as competition picked up
3. Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned

International Paper is trading at $38.39 per share, or 21.7x forward P/E. Read our free research report to see why you should think twice about including IP in your portfolio.

One Industrials Stock to Watch:

Flowserve (FLS)

Market Cap: $8.80 billion

Manufacturing the largest pump ever built for nuclear power generation, Flowserve (NYSE:FLS) manufactures and sells flow control equipment for various industries.

Why Does FLS Stand Out?

1. Operating profits increased over the last five years as the company gained some leverage on its fixed costs and became more efficient
2. Performance over the past two years shows its incremental sales were extremely profitable, as its annual earnings per share growth of 23.6% outpaced its revenue gains
3. Free cash flow margin increased by 5 percentage points over the last five years, giving the company more capital to invest or return to shareholders

Flowserve’s stock price of $69.20 implies a valuation ratio of 18.1x forward P/E. Is now a good time to buy? Find out in our full research report, it’s free for active Edge members.

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