Industrials: 13 A-Grades and Four Failures

When we last looked at industrials in March, the sector had 14 A-grades. Now it has 13. That's not the story. The story is that the sector is dividing into two groups: companies printing cash and companies burning it. The middle is disappearing.

The Numbers

Out of 30 industrials, 13 earn A-grades. That's 43% of the sector. Another five get Bs, five get Cs. Then you hit the cliff: three D-grades and four F-grades. The failures aren't small names. They're Boeing, FedEx, 3M, and Johnson Controls.

Median FCF margin sits at 12.5%. That's healthy for industrials. The sector threshold for an A-grade is 12% or higher. But that median hides the bifurcation. Strip out the top half and you're looking at a sector in trouble. Keep the top half and you're looking at some of the best cash generators in the market.

20 companies show improving trends. Only 8 are declining. That's an 80% improvement rate in quarterly cash flow direction. It sounds great until you realize that three of the four F-grades are improving too. Improving from terrible to less terrible still leaves you in the red.

The Winners

Verisk Analytics leads with a 38.8% FCF margin. That's A-grade territory in any sector, let alone industrials. Verisk sells data and analytics to insurance companies. No factories. No supply chains. No commodity exposure. Just software margins dressed up as an industrial. The trend is improving. The grade is A. This is what winning looks like.

The railroads sit right behind. Union Pacific posts 22.4%, Norfolk Southern 17.7%. CSX comes in at 12.1%. All three print cash. But only Norfolk and CSX show improving trends. Union Pacific is declining despite still posting a B-grade on margin strength. Rails benefit from pricing power and operating leverage. When volumes drop, margins compress. When they rise, cash flow accelerates. Right now, two of the three are accelerating.

Uber and Lyft both crack the top five. Uber at 18.8%, Lyft at 17.7%. Both earn A-grades. Both show improving trends. Rideshare finally figured out unit economics. Driver costs stabilized. Take rates held. The cash flow followed. Uber's margin puts it ahead of Norfolk Southern. Let that sink in.

Old Dominion Freight Line posts 17.4%. Illinois Tool Works 16.9%. Parker-Hannifin 16.8%. Rockwell Automation 16.3%. GE 15.8%. All A-grades. All different businesses. Freight, tools, motion control, automation, aerospace. The common thread is pricing power and operational discipline. These companies control their costs and pass inflation through to customers.

Lockheed Martin earns an A despite a 9.2% margin. How? Balance sheet modifiers. Defense contractors run on contracts, not market volatility. Cash flow consistency matters more than raw margin. Lockheed converts revenue to cash predictably. That consistency upgrades the grade.

The Losers

Boeing posted a -2.1% FCF margin. Negative. The company burned cash for the quarter. The trend is improving, which means it's burning less than it was. That still leaves you with an F-grade. Boeing's problems are well-documented: 737 MAX, 787 delays, defense contract overruns, supply chain chaos. The grade just confirms what everyone already knows.

FedEx comes in at 3.4%. That's an F-grade for a company that should be printing cash. FedEx operates in the same market as UPS. UPS posts 5.4%, which is also terrible but at least earns a D. The gap between the two used to be narrower. Now FedEx is losing ground on margin while UPS holds steady. Both trends are improving. Neither grade is acceptable.

3M sits at 5.6% with a declining trend. That's an F-grade moving in the wrong direction. 3M spent decades as a diversified industrial powerhouse. Now it's unwinding liabilities, spinning off businesses, and bleeding cash in the process. The margin reflects a company in managed decline.

Johnson Controls posts 4.1%, also an F. The trend is improving, but from where? JCI sells building automation and HVAC systems. Margins should be higher. The grade says the balance sheet or cash conversion is broken. When a company in a decent market can't crack 5%, the problem is operational.

The Debt Picture

Average debt-to-FCF across the sector: 5.4x. That's elevated but not catastrophic. For context, anything above 7x triggers a grade downgrade. Above 10x costs you two grades. Several of the A-grades carry debt, but they generate enough cash to service it comfortably.

The F-grades tell a different story. When your FCF margin is 3% or negative, even moderate debt becomes a anchor. Boeing's debt load relative to negative cash flow is functionally infinite. FedEx and 3M both carry billions in debt against shrinking cash generation. The math doesn't work.

What This Means

Industrials aren't broken. But the sector is splitting. Companies with pricing power, operational leverage, and disciplined capital allocation are thriving. Companies stuck in commodity markets, legacy cost structures, or self-inflicted operational disasters are struggling.

The 13 A-grades aren't accidents. They're railroads with duopolies, data companies with subscription models, rideshare platforms that finally figured out profitability, and industrial conglomerates that cut costs faster than revenue declined. The four F-grades aren't accidents either. They're airlines that can't control costs, logistics companies losing share, and manufacturers buried under legacy liabilities.

The trend data supports this. 20 improving, 8 declining. The sector is moving in the right direction on average. But averages lie when the distribution is bimodal. Half the sector is accelerating. The other half is treading water or sinking.

If you're buying industrials, buy the A-grades. The margin spread between the top and bottom quintiles is over 40 percentage points. That's not a valuation gap. That's a business quality gap. The market will figure that out eventually.