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 6.1% over the past six months. This performance was disappointing since the S&P 500 stood firm.
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. On that note, here are three industrials stocks we’re swiping left on.
Redwire (RDW)
Market Cap: $888.7 million
Based in Jacksonville, Florida, Redwire (NYSE: RDW) is a provider of systems and components used in space infrastructure.
Why Do We Think Twice About RDW?
- Earnings per share fell by 57% annually over the last four years while its revenue grew, partly because it diluted shareholders
- Cash-burning history makes us doubt the long-term viability of its business model
- Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution
Redwire’s stock price of $11.77 implies a valuation ratio of 16.5x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why RDW doesn’t pass our bar.
Honeywell (HON)
Market Cap: $137.6 billion
Originally founded in 1906 as a thermostat company, Honeywell (NASDAQ: HON) is a multinational conglomerate known for its aerospace systems, building technologies, performance materials, and safety and productivity solutions.
Why Are We Cautious About HON?
- Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
- Earnings per share lagged its peers over the last five years as they only grew by 3.9% annually
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 3.4 percentage points
Honeywell is trading at $213.18 per share, or 19.5x forward price-to-earnings. Dive into our free research report to see why there are better opportunities than HON.
Kennametal (KMT)
Market Cap: $1.72 billion
Involved in manufacturing hard tips of anti-tank projectiles in World War II, Kennametal (NYSE: KMT) is a provider of industrial materials and tools for various sectors.
Why Should You Sell KMT?
- Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
- Forecasted revenue decline of 2% for the upcoming 12 months implies demand will fall off a cliff
- Falling earnings per share over the last five years has some investors worried as stock prices ultimately follow EPS over the long term
At $22.12 per share, Kennametal trades at 14.6x forward price-to-earnings. Read our free research report to see why you should think twice about including KMT in your portfolio.
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