Even if they go mostly unnoticed, industrial businesses are the backbone of our country. Unfortunately, this role also comes with a demand profile tethered to the ebbs and flows of the broader economy, and the industry is currently lagging as its six-month return of 3.6% has trailed the S&P 500’s 8.4% gain.
Only some companies are subject to these dynamics, however, and a handful of high-quality businesses can deliver earnings growth in any environment. Keeping that in mind, here is one industrials stock boasting a durable advantage and two we’re steering clear of.
Two Industrials Stocks to Sell:
GATX (GATX)
Market Cap: $6.32 billion
Originally founded to ship beer, GATX (NYSE: GATX) provides leasing and management services for railcars and other transportation assets globally.
Why Are We Cautious About GATX?
- Investments to defend its competitive moat have ramped up over the last five years as its free cash flow margin decreased by 217.1 percentage points
- ROIC of 3.8% reflects management’s challenges in identifying attractive investment opportunities
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
GATX is trading at $178.20 per share, or 17.3x forward P/E. Check out our free in-depth research report to learn more about why GATX doesn’t pass our bar.
RXO (RXO)
Market Cap: $4.76 billion
With access to millions of trucks, RXO (NYSE: RXO) offers full-truckload, less-than-truckload, and last-mile deliveries.
Why Are We Out on RXO?
- Declining unit sales over the past two years show it’s struggled to increase its sales volumes and had to rely on price increases
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
- Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders
RXO’s stock price of $28.74 implies a valuation ratio of 185.9x forward P/E. Dive into our free research report to see why there are better opportunities than RXO.
One Industrials Stock to Buy:
Rocket Lab (RKLB)
Market Cap: $39.32 billion
Becoming the first private company in the Southern Hemisphere to reach space, Rocket Lab (NASDAQ: RKLB) offers rockets designed for launching small satellites.
Why Do We Love RKLB?
- Annual revenue growth of 55.1% over the past two years was outstanding, reflecting market share gains this cycle
- Operating profits increased over the last five years as the company gained some leverage on its fixed costs and became more efficient
- Cash burn has decreased over the last five years, showing the company is becoming a more self-sustaining business
At $66.03 per share, Rocket Lab trades at 41.5x forward price-to-sales. Is now the right time to buy? Find out in our full research report, it’s free.
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