3 Industrials Stocks in the Penalty Box

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 industry’s six-month return of 4.5% has fallen short of the S&P 500’s 9% rise.

Some companies can grow regardless of the economic backdrop, but the odds aren’t great for the ones we’re analyzing today. Taking that into account, here are three industrials stocks that may face trouble.

Timken (TKR)

Market Cap: $5.88 billion

Established after the founder noticed the difficulty freight wagons had making sharp turns, Timken (NYSE:TKR) is a provider of industrial parts used across various sectors.

Why Should You Sell TKR?

1. Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
2. Sales over the last two years were less profitable as its earnings per share fell by 2.9% annually while its revenue was flat
3. 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

Timken’s stock price of $84.57 implies a valuation ratio of 13.2x forward price-to-earnings. Check out our free in-depth research report to learn more about why TKR doesn’t pass our bar.

Limbach (LMB)

Market Cap: $939.6 million

Established in 1901, Limbach (NASDAQ: LMB) provides integrated building systems solutions, including mechanical, electrical, and plumbing services.

Why Are We Cautious About LMB?

1. Annual sales declines of 1.8% for the past five years show its products and services struggled to connect with the market during this cycle
2. High input costs result in an inferior gross margin of 19.2% that must be offset through higher volumes
3. 5.2 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position

At $83.65 per share, Limbach trades at 35.7x forward price-to-earnings. Dive into our free research report to see why there are better opportunities than LMB.

ABM Industries (ABM)

Market Cap: $3.30 billion

Started with a $4.50 investment to purchase a bucket, sponge, and mop, ABM (NYSE:ABM) offers janitorial, parking, and facility services.

Why Is ABM Risky?

1. Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
2. Performance over the past two years shows its incremental sales were much less profitable, as its earnings per share fell by 1.1% annually
3. Free cash flow margin dropped by 5 percentage points over the last five years, implying the company became more capital intensive as competition picked up

ABM Industries is trading at $53.69 per share, or 14.5x forward price-to-earnings. To fully understand why you should be careful with ABM, check out our full research report (it’s free).

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