3 Industrials Stocks Skating on Thin Ice

Even if they go mostly unnoticed, industrial businesses are the backbone of our country. 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 5.9% over the past six months. This drop was disheartening since the S&P 500 held its ground.

A cautious approach is imperative when dabbling in these companies as the losers can be left for dead when the cycle naturally turns and the winners consolidate. Keeping that in mind, here are three industrials stocks best left ignored.

LSI (LYTS)

Market Cap: $473 million

Enhancing commercial environments, LSI (NASDAQ:LYTS) provides lighting and display solutions for businesses and retailers.

Why Does LYTS Worry Us?

1. 4.5% annual revenue growth over the last two years was slower than its industrials peers
2. Annual earnings per share growth of 2.7% underperformed its revenue over the last two years, partly because it diluted shareholders
3. 5.9 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position

LSI is trading at $16.33 per share, or 13.6x forward P/E. To fully understand why you should be careful with LYTS, check out our full research report (it’s free).

H&E Equipment Services (HEES)

Market Cap: $3.48 billion

Founded after recognizing a growth trend along the Mississippi River and opportunities developing in the earthmoving and construction equipment business, H&E (NASDAQ:HEES) offers machinery for companies to purchase or rent.

Why Are We Cautious About HEES?

1. Annual revenue growth of 2.1% over the last five years was below our standards for the industrials sector
2. Earnings per share have contracted by 16% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance
3. Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital

At $95.98 per share, H&E Equipment Services trades at 6.4x forward EV-to-EBITDA. If you’re considering HEES for your portfolio, see our FREE research report to learn more.

Sanmina (SANM)

Market Cap: $4.50 billion

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

Why Is SANM Risky?

1. Customers postponed purchases of its products and services this cycle as its revenue declined by 6.2% annually over the last two years
2. High input costs result in an inferior gross margin of 8.2% that must be offset through higher volumes
3. Earnings per share have dipped by 4.2% annually over the past two years, which is concerning because stock prices follow EPS over the long term

Sanmina’s stock price of $84.12 implies a valuation ratio of 12.5x forward P/E. Check out our free in-depth research report to learn more about why SANM doesn’t pass our bar.

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