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 15.9% return over the past six months has topped the S&P 500 by 5.1 percentage points.
Regardless of these results, investors should tread carefully. The diversity of companies in this space means that not all are created equal or well-positioned for the inescapable downturn. On that note, here are three industrials stocks that may face trouble.
AeroVironment (AVAV)
Market Cap: $9.37 billion
Focused on the future of autonomous military combat, AeroVironment (NASDAQ:AVAV) specializes in advanced unmanned aircraft systems and electric vehicle charging solutions.
Why Is AVAV Not Exciting?
- Expenses have increased as a percentage of revenue over the last five years as its operating margin fell by 15.3 percentage points
- Performance over the past two years shows its incremental sales were much less profitable, as its earnings per share fell by 8.4% annually
- Free cash flow margin shrank by 6.3 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
At $185.36 per share, AeroVironment trades at 51.9x forward P/E. If you’re considering AVAV for your portfolio, see our FREE research report to learn more.
AerSale (ASLE)
Market Cap: $301 million
Providing a one-stop shop that integrates multiple services and product offerings, AerSale (NASDAQ:ASLE) delivers full-service support to mid-life commercial aircraft.
Why Do We Pass on ASLE?
- Products and services are facing end-market challenges during this cycle, as seen in its flat sales over the last two years
- Free cash flow margin shrank by 36.5 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
AerSale is trading at $6.63 per share, or 0.9x trailing 12-month price-to-sales. Dive into our free research report to see why there are better opportunities than ASLE.
Werner (WERN)
Market Cap: $2.61 billion
Conducting business in over a 100 countries, Werner (NASDAQ:WERN) offers full-truckload, less-than-truckload, and intermodal delivery services.
Why Is WERN Risky?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 2.3% annually over the last two years
- Earnings per share fell by 44.6% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Werner’s stock price of $43.47 implies a valuation ratio of 37.1x forward P/E. Check out our free in-depth research report to learn more about why WERN doesn’t pass our bar.
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