3 Industrials Stocks with Questionable Fundamentals
Industrials businesses quietly power the physical things we depend on, from cars and homes to e-commerce infrastructure. They are also bound to benefit from a friendlier regulatory environment with the Trump administration, and this excitement has led to a six-month gain of 18.4% for the sector - higher than the S&P 500’s 13.4% return.
Nevertheless, investors must be mindful as the cycle can unexpectedly turn. When this inevitably happens, only the elite companies will survive and ultimately thrive. Keeping that in mind, here are three industrials stocks we’re passing on.
Mayville Engineering (MEC)
Market Cap: $374.9 million
Originally founded solely on tool and die manufacturing, Mayville Engineering Company (NYSE:MEC) specializes in metal fabrication, tube bending, and welding to be used in various industries.
Why Do We Think Twice About MEC?
- Annual sales declines of 3.1% for the past two years show its products and services struggled to connect with the market during this cycle
- Competitive supply chain dynamics and steep production costs are reflected in its low gross margin of 12.8%
- Earnings per share have dipped by 52.4% annually over the past two years, which is concerning because stock prices follow EPS over the long term
Mayville Engineering is trading at $18.44 per share, or 78.8x forward P/E. Check out our free in-depth research report to learn more about why MEC doesn’t pass our bar.
MasTec (MTZ)
Market Cap: $17.44 billion
Involved in the 1996 Olympic Games MasTec (NYSE:MTZ) is an infrastructure construction company that specializes in the telecommunications, energy, and utility industries.
Why Are We Cautious About MTZ?
- Competitive supply chain dynamics and steep production costs are reflected in its low gross margin of 12.9%
- Operating margin of 3.1% fell from an already low starting point over the last five years because it pursued growth instead of profits
- Free cash flow margin dropped by 4.2 percentage points over the last five years, implying the company became more capital intensive as competition picked up
MasTec’s stock price of $224.67 implies a valuation ratio of 28.7x forward P/E. Read our free research report to see why you should think twice about including MTZ in your portfolio.
D.R. Horton (DHI)
Market Cap: $42.46 billion
One of the largest homebuilding companies in the U.S., D.R. Horton (NYSE:DHI) builds a variety of new construction homes across multiple markets.
Why Does DHI Fall Short?
- Product roadmap and go-to-market strategy need to be reconsidered as its backlog has averaged 15.5% declines over the past two years
- Earnings per share have dipped by 8.5% annually over the past two years, which is concerning because stock prices follow EPS over the long term
- Waning returns on capital imply its previous profit engines are losing steam
At $145.10 per share, D.R. Horton trades at 13x forward P/E. Dive into our free research report to see why there are better opportunities than DHI.
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