Even if they go mostly unnoticed, industrial businesses are the backbone of our country. 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 18.7% return over the past six months has topped the S&P 500 by 12.5 percentage points.
Although these companies have produced results lately, a cautious approach is imperative. When the cycle naturally turns, the losers can be left for dead while the winners consolidate and take more of the market. Taking that into account, here are two industrials stocks boasting durable advantages and one best left ignored.
One Industrials Stock to Sell:
Autoliv (ALV)
Market Cap: $9.67 billion
With products estimated to save over 30,000 lives annually in traffic accidents worldwide, Autoliv (NYSE: ALV) develops and manufactures passive safety systems for vehicles, including airbags, seatbelts, and steering wheels that protect occupants during crashes.
Why Is ALV Not Exciting?
- The company has faced growth challenges as its 1.8% annual revenue increases over the last two years fell short of other industrials companies
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 1.5%
- High input costs result in an inferior gross margin of 17.9% that must be offset through higher volumes
Autoliv is trading at $118.97 per share, or 0.8x forward price-to-sales. Dive into our free research report to see why there are better opportunities than ALV.
Two Industrials Stocks to Watch:
Johnson Controls (JCI)
Market Cap: $87.86 billion
Founded after patenting the electric room thermostat, Johnson Controls (NYSE: JCI) specializes in building products and technology solutions, including HVAC systems, fire and security systems, and energy storage.
Why Could JCI Be a Winner?
- Adequate gross margin of 32.9% gives it sufficient room to spend on marketing and product development
- Performance over the past two years was boosted by share buybacks, which enabled its earnings per share to grow faster than its revenue
- Free cash flow margin increased by 6.5 percentage points over the last five years, giving the company more capital to invest or return to shareholders
Johnson Controls’s stock price of $142.50 implies a valuation ratio of 26.6x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free.
ATI (ATI)
Market Cap: $27.23 billion
With its materials flying in nearly every commercial and military aircraft in service today, ATI (NYSE: ATI) produces highly specialized materials and components for aerospace, defense, medical, and energy applications using advanced metallurgy and manufacturing processes.
Why Will ATI Outperform?
- Annual revenue growth of 11.1% over the last five years was superb and indicates its market share increased during this cycle
- Share repurchases over the last two years enabled its annual earnings per share growth of 24.8% to outpace its revenue gains
- Free cash flow margin expanded by 21.7 percentage points over the last five years, providing additional flexibility for investments and share buybacks/dividends
At $197.25 per share, ATI trades at 43.5x forward P/E. Is now the time to initiate a position? See for yourself in our full research report, it’s free.
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