We have issued an updated research report on Applied Industrial Technologies, Inc. AIT on May 28.
The company specializes in distributing engineered fluid power components, specialty flow control solutions and miscellaneous industrial supplies.
It currently carries a Zacks Rank 3 (Hold) and has a market capitalization of $2.3 billion.
Factors Favoring Applied Industrial
Inorganic Activities: The company has been investing in acquisitions over time. It acquired Sentinel Fluid Controls in March 2017, FCX Performance in January 2018 and Fluid Power Sales in November 2018. Also, the company bought MilRoc Distribution and Woodward Steel in March 2019, and purchased Olympus Controls in August 2019.
It is worth noting here that acquired assets had positively impacted the company’s sales by 1.9% in third-quarter fiscal 2020 (ended Mar 31, 2020).
Shareholder-Friendly Policies: Applied Industrial is committed toward rewarding shareholders handsomely through dividend payouts. It distributed dividends of $36.4 million in the first three quarters of fiscal 2020 (ended Mar 31, 2020), reflecting growth of 3.3% from the year-ago period (ended March 2019).
It is worth mentioning here that the company announced a hike of 3.2% in its quarterly dividend rate to 32 cents in January 2020. We believe that healthy cash flow will support it to return more value to shareholders in the quarters ahead.
Multiple Tailwinds: In the wake of the coronavirus outbreak, Applied Industrial noted that the satisfaction of customers, safety of its workers, a reliable supply chain and generation of cash are its priorities. Further, its cost-reduction actions (including lowering discretionary spending, pay reductions, staff adjustments and others) might be a relief.
In addition, the company’s focus on value-added services, cost-saving initiatives, focus on improving the product line and initiatives to drive operational excellence might be beneficial in the years ahead.
Furthermore, the Zacks Consensus Estimate for the company’s earnings has increased by 3.6% to $3.70 for fiscal 2020 (ending June 2020) and by 8.7% to $3.25 for fiscal 2021 (ending June 2021) in the past 60 days.
Applied Industrial Technologies, Inc. Price and Consensus
Applied Industrial Technologies, Inc. price-consensus-chart | Applied Industrial Technologies, Inc. Quote
Factors Working Against Applied Industrial
Share Price Performance and Pandemic Woes: Market sentiments have been against the company for quite some time now. Its stock price has decreased 10.1% since the beginning of 2020 compared with the industry’s decline of 14.9%.
The company is wary about the adverse impacts of the pandemic on its operations. It noted that industry demand has suffered, as is evident from a decline in organic sales for April. Further, it withdrew projections for fiscal 2020.
High Debts: A highly leveraged balance sheet might increase financial obligations and hurt Applied Industrial’s profitability. Its long-term debt was $864.8 million at the end of third-quarter fiscal 2020. Its total debt to total capital was at 53.2%, higher than 49.6% at the end of the fiscal second quarter.
We find the company’s ability to repay its financial obligations (and not its debts) more concerning now. Notably, its cash and cash equivalents were just $165.5 million at the third-quarter end. In addition, the company’s times interest earned was at 3x at the end of third-quarter fiscal 2020, lower than 5.7x in the previous quarter and 9.4x of the industry.
Woes Related to International Presence: Operations in Australia, North America, Singapore and New Zealand have exposed Applied Industrial to geopolitical issues, macroeconomic challenges and unfavorable movements in foreign currencies. Forex woes adversely impacted its third-quarter sales by 0.2%.
Stocks to Consider
Some better-ranked stocks in the Zacks Industrial Products sector are Silgan Holdings Inc. SLGN, Broadwind Energy, Inc. BWEN and Graphic Packaging Holding Company GPK. While Silgan currently sports a Zacks Rank #1 (Strong Buy), both Broadwind Energy and Graphic Packaging carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
In the past 60 days, earnings estimates for Silgan Holdings and Graphic Packaging improved for the current year, while have been unchanged for Broadwind Energy. Further, earnings surprise for the last reported quarter was 16.33% for Silgan Holdings, 200% for Broadwind Energy and 24% for Graphic Packaging.
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