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 20.9% gain over the past six months, beating the S&P 500 by 10 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. With that said, here is one industrials stock boasting a durable advantage and two best left ignored.
Two Industrials Stocks to Sell:
Transcat (TRNS)
Market Cap: $789.5 million
Serving the pharmaceutical, industrial manufacturing, energy, and chemical process industries, Transcat (NASDAQ:TRNS) provides measurement instruments and supplies.
Why Are We Cautious About TRNS?
- Issuance of new shares over the last two years caused its earnings per share to fall by 11.1% annually while its revenue grew
- ROIC of 7.4% reflects management’s challenges in identifying attractive investment opportunities, and its decreasing returns suggest its historical profit centers are aging
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
At $84.75 per share, Transcat trades at 44.9x forward P/E. To fully understand why you should be careful with TRNS, check out our full research report (it’s free).
Pangaea (PANL)
Market Cap: $495.2 million
Established in 1996, Pangaea Logistics (NASDAQ:PANL) specializes in global logistics and transportation services, focusing on the shipment of dry bulk cargoes.
Why Does PANL Give Us Pause?
- Expenses have increased as a percentage of revenue over the last five years as its operating margin fell by 5.4 percentage points
- Earnings per share have contracted by 29.3% annually over the last four years, a headwind for returns as stock prices often echo long-term EPS performance
- Poor free cash flow margin of 1.2% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
Pangaea’s stock price of $7.57 implies a valuation ratio of 0.7x trailing 12-month price-to-sales. Read our free research report to see why you should think twice about including PANL in your portfolio.
One Industrials Stock to Buy:
Federal Signal (FSS)
Market Cap: $6.51 billion
Developing sirens that warned of air raid attacks or fallout during the Cold War, Federal Signal (NYSE:FSS) provides safety and emergency equipment for government agencies, municipalities, and industrial companies.
Why Is FSS a Good Business?
- Annual revenue growth of 15.3% over the past two years was outstanding, reflecting market share gains this cycle
- Additional sales over the last two years increased its profitability as the 29.8% annual growth in its earnings per share outpaced its revenue
- Free cash flow margin expanded by 11.1 percentage points over the last five years, providing additional flexibility for investments and share buybacks/dividends
Federal Signal is trading at $106.69 per share, or 22.5x forward P/E. Is now a good time to buy? See for yourself in our in-depth research report, it’s free.
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