3 Industrials Stocks with Mounting Challenges

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 10.4% over the past six months. This drop was worse than the S&P 500’s 1.9% decline.

Investors should tread carefully as timing cyclical companies is a challenging task, and any misstep can have you catching a falling knife. Keeping that in mind, here are three industrials stocks we’re swiping left on.

Tennant (TNC)

Market Cap: $1.39 billion

As the world’s largest manufacturer of autonomous mobile robots, Tennant (NYSE:TNC) designs, manufactures, and sells cleaning products to various sectors.

Why Are We Hesitant About TNC?

1. Muted 2.3% annual revenue growth over the last five years shows its demand lagged behind its industrials peers
2. Estimated sales decline of 1% for the next 12 months implies a challenging demand environment
3. Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 7.1 percentage points

Tennant’s stock price of $74.46 implies a valuation ratio of 12x forward P/E. To fully understand why you should be careful with TNC, check out our full research report (it’s free).

Ryder (R)

Market Cap: $6.22 billion

As one of the first companies to introduce the idea of leasing trucks, Ryder (NYSE:R) provides rental vehicles to businesses and delivers packages directly to homes or businesses.

Why Do We Pass on R?

1. Annual sales growth of 2.3% over the last two years lagged behind its industrials peers as its large revenue base made it difficult to generate incremental demand
2. Earnings per share have contracted by 11% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance
3. Free cash flow margin shrank by 14.1 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive

At $150.35 per share, Ryder trades at 11.2x forward P/E. If you’re considering R for your portfolio, see our FREE research report to learn more.

C.H. Robinson Worldwide (CHRW)

Market Cap: $11.43 billion

Engaging in contracts with tens of thousands of transportation companies, C.H. Robinson (NASDAQ:CHRW) offers freight transportation and logistics services.

Why Is CHRW Risky?

1. Sales tumbled by 12.1% annually over the last two years, showing market trends are working against its favor during this cycle
2. Issuance of new shares over the last two years caused its earnings per share to fall by 13.7% annually, even worse than its revenue declines
3. Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability

C.H. Robinson Worldwide is trading at $96.30 per share, or 19.9x forward P/E. Check out our free in-depth research report to learn more about why CHRW doesn’t pass our bar.

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