Whether you see them or not, industrials businesses play a crucial part in our daily activities. 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 21.9% return over the past six months has topped the S&P 500 by 15.2 percentage points.
Nevertheless, investors must be mindful as the cycle can unexpectedly turn. When this inevitably happens, only the elite companies will survive and ultimately thrive. Taking that into account, here are three industrials stocks we’re passing on.
Mayville Engineering (MEC)
Market Cap: $429.5 million
Originally founded solely on tool and die manufacturing, Mayville Engineering Company (NYSE: MEC) specializes in metal fabrication, tube bending, and welding to be used in various industries.
Why Are We Hesitant About MEC?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 3.1% annually over the last two years
- Gross margin of 12.8% reflects its high production costs
- Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term
Mayville Engineering’s stock price of $21.16 implies a valuation ratio of 97.5x forward P/E. If you’re considering MEC for your portfolio, see our FREE research report to learn more.
Richardson Electronics (RELL)
Market Cap: $186.3 million
Founded in 1947, Richardson Electronics (NASDAQ: RELL) is a distributor of power grid and microwave tubes as well as consumables related to those products.
Why Are We Out on RELL?
- Sales pipeline suggests its future revenue growth won’t meet our standards as its backlog averaged 3.4% declines over the past two years
- Low free cash flow margin of -0.9% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Richardson Electronics is trading at $12.87 per share, or 39.7x forward P/E. To fully understand why you should be careful with RELL, check out our full research report (it’s free).
Icahn Enterprises (IEP)
Market Cap: $4.82 billion
Founded in 1987, Icahn Enterprises (NASDAQ: IEP) is a diversified holding company primarily engaged in investment and asset management across various sectors.
Why Is IEP Not Exciting?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 9.6% annually over the last two years
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
- 8× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
At $8.08 per share, Icahn Enterprises trades at 0.5x forward price-to-sales. Dive into our free research report to see why there are better opportunities than IEP.
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