Whether you see them or not, industrials businesses play a crucial part in our daily activities. Their momentum is also rising as lower interest rates have incentivized higher capital spending. As a result, the industry has posted a 34.5% gain over the past six months, beating the S&P 500 by 11.9 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 that may face trouble.
Titan International (TWI)
Market Cap: $487.5 million
Acquiring Goodyear’s farm tire business in 2005, Titan (NSYE:TWI) is a manufacturer and supplier of wheels, tires, and undercarriages used in off-highway vehicles such as construction vehicles.
Why Is TWI Risky?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 7.2% annually over the last two years
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
- Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution
Titan International is trading at $7.63 per share, or 42x forward P/E. Dive into our free research report to see why there are better opportunities than TWI.
Donaldson (DCI)
Market Cap: $9.69 billion
Playing a vital role in the historic Apollo 11 mission, Donaldson (NYSE:DCI) manufacturers and sells filtration equipment for various industries.
Why Does DCI Fall Short?
- 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
- Anticipated sales growth of 3.2% for the next year implies demand will be shaky
- 2.8 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 $83.69 per share, Donaldson trades at 20.8x forward P/E. Read our free research report to see why you should think twice about including DCI in your portfolio.
Winnebago (WGO)
Market Cap: $1.05 billion
Created to provide high-quality, affordable RVs to the post-war American family, Winnebago (NYSE:WGO) is a manufacturer of recreational vehicles, providing a range of motorhomes, travel trailers, and fifth-wheel products for outdoor and adventure lifestyles.
Why Do We Think WGO Will Underperform?
- Annual sales declines of 10.5% for the past two years show its products and services struggled to connect with the market during this cycle
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 8.3% annually while its revenue grew
- Diminishing returns on capital suggest its earlier profit pools are drying up
Winnebago’s stock price of $37.35 implies a valuation ratio of 15.7x forward P/E. Check out our free in-depth research report to learn more about why WGO doesn’t pass our bar.
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