On Jan 3, 2014, we maintained our recommendation on Actuant Corporation (ATU) at Neutral. Despite an increase in sales, reduction in margins is a matter of concern and thus largely led to our Neutral recommendation.
Why the Reiteration?
With a market capitalization of $2.7 billion, Actuant is involved in the designing, manufacturing and distribution of various industrial products and systems for its clients in more than 30 countries. With the acquisition spree undertaken by the company, we expect higher revenues in the upcoming quarters. Along with this, Actuant is also experiencing rise in core revenues.
The company’s initiatives to enhance shareholders’ value also impress us. Actuant has been repurchasing shares in the past quarters and is expected to continue doing so in the quarters ahead.
However, international presence also increases the company’s exposure to foreign currency risks, various environmental and economical laws as well as cultural diversity. This may lead to severe operational disruptions for the company.
Additionally, to survive in this highly competitive market, Actuant needs to keep inventing products and technologies. This involves a huge research and development expenditure which may prove to be futile if customers are not convinced. This also reduces the company’s price control over its products, which may result in the loss of market share, fall in sales and operating margins.
A glimpse of the fiscal first-quarter 2014 financial results clearly depicts mixed company performance in the quarter. Actuant’s adjusted earnings per share were 44 cents in the quarter, down from the Zacks Consensus Estimate of 46 cents.
Revenues increased 10.3% year over year, as acquisitions contributed significantly along with improvement in the core business. However, higher costs in the quarter led to a year-over-year gross margin contraction of 160 basis points to 38.8%.
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