Even if they go mostly unnoticed, industrial businesses are the backbone of our country. But they are at the whim of volatile macroeconomic factors that influence capital spending (like interest rates), and the industry has underperformed the market over the past six months as its 7.2% return lagged the S&P 500 by 2.3 percentage points.
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 we’re passing on.
Wabash (WNC)
Market Cap: $528.9 million
With its first trailer reportedly built on two sawhorses, Wabash (NYSE:WNC) offers semi trailers, liquid transportation containers, truck bodies, and equipment for moving goods.
Why Do We Pass on WNC?
- Product roadmap and go-to-market strategy need to be reconsidered as its backlog has averaged 24.3% declines over the past two years
- Free cash flow margin dropped by 5.1 percentage points over the last five years, implying the company became more capital intensive as competition picked up
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
Wabash’s stock price of $12.46 implies a valuation ratio of 10x forward price-to-earnings. If you’re considering WNC for your portfolio, see our FREE research report to learn more.
Covenant Logistics (CVLG)
Market Cap: $691.1 million
Started with 25 trucks and 50 trailers, Covenant Logistics (NASDAQ:CVLG) is a provider of expedited long haul freight services, offering a range of logistics solutions.
Why Is CVLG Risky?
- Annual sales declines of 3.6% for the past two years show its products and services struggled to connect with the market during this cycle
- Earnings per share have dipped by 17.8% annually over the past two years, which is concerning because stock prices follow EPS over the long term
- 22.5 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
At $26.54 per share, Covenant Logistics trades at 11x forward price-to-earnings. Check out our free in-depth research report to learn more about why CVLG doesn’t pass our bar.
Taylor Morrison Home (TMHC)
Market Cap: $6.41 billion
Named “America’s Most Trusted Home Builder” in 2019, Taylor Morrison Home (NYSE:TMHC) builds single family homes and communities across the United States.
Why Are We Cautious About TMHC?
- Sales pipeline suggests its future revenue growth won’t meet our standards as its backlog averaged 14.4% declines over the past two years
- Earnings per share have dipped by 3.4% annually over the past two years, which is concerning because stock prices follow EPS over the long term
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 15.6 percentage points
Taylor Morrison Home is trading at $62.54 per share, or 7x forward price-to-earnings. To fully understand why you should be careful with TMHC, check out our full research report (it’s free).
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