It has been about a month since the last earnings report for Applied Industrial Technologies (AIT). Shares have lost about 10.2% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Applied Industrial Technologies due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Applied Industrial Lags Q3 Earnings, Tightens FY19 View
Applied Industrial disappointed, with weaker-than-expected third-quarter fiscal 2019 (ended Mar 31, 2019) results. Earnings lagged estimates by 0.85% while sales missed estimates by 2.67%. The poor bottom-line performance was the second in a row, with a negative earnings surprise of 6.60% recorded in the last reported quarter.
Going by figures, earnings were $1.16 per share, lagging the Zacks Consensus Estimate of $1.17. However, quarterly earnings increased 9.4% from the year-ago number of $1.06 on the back of solid revenue growth. It is worth noting that the bottom line includes the adverse impact of non-cash LIFO charge.
Segmental Performances Drive Revenues
In the reported quarter, Applied Industrial's net sales were $885.4 million, reflecting year-over-year growth of 7%. This improvement was primarily driven by 2.3% organic growth (adjusted for days) and 6.2% gain from acquired assets, partially offset by adverse impacts of 0.8% from selling days and 0.7% from unfavorable movements in foreign currencies.
However, the top line lagged the Zacks Consensus Estimate of $910 million.
The company reports revenues under two market segments. A brief discussion of the quarterly results is provided below:
Service Center-Based Distribution's revenues totaled $630 million, representing 71.2% of net revenues in the quarter under review. On a year-over-year basis, the segment's revenues grew 4.8% on the back of 6% gain from organic sales and 0.6% gain from acquired assets. However, these were partially offset by 0.8% adverse impact of selling days and 0.9% from forex woes.
The Fluid Power & Flow Control segment generated revenues of $255 million, accounting for roughly 28.8% of net revenues in the reported quarter. Sales grew 12.8% year over year, primarily driven by 21.1% gain from acquired assets. This was partially offset by 7.5% impact of decline in organic sales and 1% adverse impact of selling days.
Operating Margin Falls Y/Y
In the reported quarter, Applied Industrial's cost of sales increased 7.1% year over year to $629.9 million. Cost of sales was 71.1% of the quarter's net sales. Gross margin was roughly flat year over year at 28.9%.
Selling, general and administrative expenses (including depreciation) increased 3.5% year over year to $189.5 million. It represented 21.4% of net sales in the reported quarter versus 22.1% in the year-ago quarter. Operating profit declined 38.9% year over year to $34.9 million, with a year-over-year decline of 290 basis points to 3.9%.
Balance Sheet & Cash Flow
Exiting the fiscal third quarter, Applied Industrial had cash and cash equivalents of $47.4 million, down 40.6% from $79.8 million recorded in the last reported quarter. Long-term debt was up 1.5% sequentially to $937.5 million.
In the first nine months of fiscal 2019, the company generated net cash of $77.2 million from operating activities, roughly 61.2% higher than $47.9 million generated in the comparable period a year ago. Capital spent on property purchase totaled $11.7 million versus $17.9 million in the year-ago period.
Applied Industrial rewarded shareholders with dividend payments, amounting to $35.3 million in the first nine months of fiscal 2019. This amount represents growth of 3.1% from the previous year. During the same period, it purchased 192 thousand shares for $11.2 million.
Concurrent with the earnings release, the company announced that its board of directors approved the payment of a quarterly dividend of 31 cents per share. The dividend will be paid on May 31, 2019, to shareholders of record as of May 15, 2019.
Exiting the reported quarter, the company had the authorization to repurchase roughly 864 thousand shares.
For fiscal 2019 (ending June 2019), Applied Industrial predicts sales growth of 14-15% versus 12.5-15% mentioned earlier. Organic sales in the year are projected to grow 3-4%, up from previously stated 2-3%.
Earnings per share are anticipated to be $4.50-$4.60 versus $4.45-$4.65 stated earlier. Despite the tightening of the projection, the mid-point has been maintained at $4.55. The full-year guidance pegs fourth-quarter earnings at $1.11-$1.21.
Free cash flow is anticipated to be $105-$125 million.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
Currently, Applied Industrial Technologies has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, Applied Industrial Technologies has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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