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 21.7% gain over the past six months, beating the S&P 500 by 11.6 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. With that said, here are three industrials stocks we’re passing on.
MYR Group (MYRG)
Market Cap: $3.89 billion
Constructing electrical and phone lines in the American Midwest dating back to the 1890s, MYR Group (NASDAQ:MYRG) is a specialty contractor in the electrical construction industry.
Why Are We Hesitant About MYRG?
- New orders were hard to come by as its backlog was flat over the past two years
- High input costs result in an inferior gross margin of 10.8% that must be offset through higher volumes
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
MYR Group is trading at $250.34 per share, or 28.6x forward P/E. If you’re considering MYRG for your portfolio, see our FREE research report to learn more.
Dover (DOV)
Market Cap: $28.34 billion
A company that manufactured critical equipment for the United States military during World War II, Dover (NYSE:DOV) manufactures engineered components and specialized equipment for numerous industries.
Why Are We Wary of DOV?
- 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 growth underperformed the sector average over the last two years as its EPS grew by just 4.7% annually
- Eroding returns on capital suggest its historical profit centers are aging
Dover’s stock price of $202.18 implies a valuation ratio of 19.8x forward P/E. Dive into our free research report to see why there are better opportunities than DOV.
PulteGroup (PHM)
Market Cap: $25.38 billion
Having delivered over 850,000 homes since its founding in 1950, PulteGroup (NYSE:PHM) is one of America's largest homebuilders, constructing single-family homes, townhouses, and condominiums for first-time, move-up, and active adult buyers across 46 markets in 25 states.
Why Is PHM Not Exciting?
- Demand cratered as it couldn’t win new orders over the past two years, leading to an average 8.2% decline in its backlog
- Projected sales decline of 6.6% for the next 12 months points to a tough demand environment ahead
- Earnings per share were flat over the last two years and fell short of the peer group average
At $130.98 per share, PulteGroup trades at 12.7x forward P/E. Check out our free in-depth research report to learn more about why PHM doesn’t pass our bar.
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