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 12.1% over the past six months. This performance is a noticeable divergence from the S&P 500’s 6.8% return.
Only some companies are subject to these dynamics, however, and a handful of high-quality businesses can deliver earnings growth in any environment. Taking that into account, here is one resilient industrials stock at the top of our wish list and two we would avoid.
Two industrials stocks to sell:
AGCO (AGCO)
Market Cap: $7.43 billion
With a history that features both organic growth and acquisitions, AGCO (NYSE: AGCO) designs, manufactures, and sells agricultural machinery and related technology.
Why Are We Out on AGCO?
- Sales were flat over the last five years, indicating it’s failed to expand this cycle
- Falling earnings per share over the last five years has some investors worried as stock prices ultimately follow EPS over the long term
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
AGCO’s stock price of $106.10 implies a valuation ratio of 16.7x forward P/E. Check out our free in-depth research report to learn more about why AGCO doesn’t pass our bar.
Allient (ALNT)
Market Cap: $1.49 billion
Founded in 1962, Allient (NASDAQ: ALNT) develops and manufactures precision and specialty-controlled motion components and systems.
Why Are We Hesitant About ALNT?
- Products and services are facing end-market challenges during this cycle, as seen in its flat sales over the last two years
- Low free cash flow margin of 4.5% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- Low returns on capital reflect management’s struggle to allocate funds effectively
Allient is trading at $87.77 per share, or 28.1x forward P/E. To fully understand why you should be careful with ALNT, check out our full research report (it’s free).
One industrials stock to watch:
Douglas Dynamics (PLOW)
Market Cap: $918.5 million
Once manufacturing snowplows designed for the iconic jeep vehicle precursor, Douglas Dynamics (NYSE: PLOW) offers snow and ice equipment for the roads and sidewalks.
Why Are We Positive on PLOW?
- Annual revenue growth of 10.4% over the last two years beat the sector average and underscores the unique value of its offerings
- Incremental sales over the last two years have been highly profitable as its earnings per share increased by 43.6% annually, topping its revenue gains
- Free cash flow margin grew by 11 percentage points over the last five years, giving the company more chips to play with
At $39.79 per share, Douglas Dynamics trades at 12.6x forward P/E. Is now a good time to buy? See for yourself in our in-depth research report, it’s free.
Stocks we like even more
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