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End-Market Uncertainties Challenge Applied Industrial's Sales

Zacks Equity Research

We issued an updated research report on Applied Industrial Technologies, Inc. AIT on Aug 20.

The industrial products distributor currently carries a Zacks Rank #5 (Strong Sell) and has a market capitalization of approximately $2.1 billion.

Below we discussed why it will be prudent for investors to avoid investing in the stock for now.

Share Price Performances & Earnings Estimate Revision: Market sentiments have been against Applied Industrial for quite some time now. Its stock price has decreased roughly 3.3% in the past three months against the industry’s decline of 1.7%.



The company reported weak results for fourth-quarter fiscal 2019 (ended Jun 30, 2019), with earnings and revenues lagging estimates by 14.3% and 4.5%, respectively. This was the company’s third consecutive quarter of weak results.

We believe that weak results and prevailing concerns created bearish sentiments for the stock. In the past seven days, the company’s earnings estimates for the first quarter of fiscal 2020 declined 8.1% to $1.14 and for the fiscal year (ending Jun 2020) moved down 5.9% to $4.75.

Applied Industrial Technologies, Inc. Price and Consensus

 

Applied Industrial Technologies, Inc. Price and Consensus

Applied Industrial Technologies, Inc. price-consensus-chart | Applied Industrial Technologies, Inc. Quote

Top Line Weakness: The company’s top line in fourth-quarter fiscal 2019 suffered from end-market challenges, especially in fluid power technology. It is worth noting here that the Fluid Power & Flow Control segment’s sales in the quarter declined 8.5% year over year.

In the near term, Applied Industrial remains wary of uncertainties related to the broader industrial cycle. For fiscal 2020, the company’s organic sales (adjusted for days) are likely to decline 1-5%.

Cost & Forex-Related Woes: Over time, Applied Industrial has been dealing with high costs and expenses. In fiscal 2019 (ended Jun 30, 2019), the company’s cost of sales grew 12.6% year over year while operating expenses expanded 12.8%. Notably, its gross margin was down 30 basis points due to adverse impacts of inflation.

We believe that rising costs, if unchecked, might continue to hurt Applied Industrial's margins and profitability in the quarters ahead. In addition to these, the company is exposed to several economic, political and environmental headwinds. Stronger U.S. dollar is currently weighing over its international revenues and profitability.

Long-Term Debt: We believe that a highly leveraged balance sheet can be troubling for Applied Industrial. Exiting fiscal 2019, the company's long-term debt was $909 million while interest expenses increased 71.1% year over year. We believe that rising debt, if unchecked, will increase its financial obligations and might prove detrimental to its profitability.

It is worth noting here that the company's long-term debt rose 46.9% (CAGR) in the last three fiscal years (2017-2019).

Stocks to Consider

Some better-ranked stocks in the industry are Graham Corporation GHM, DXP Enterprises, Inc. DXPE and Roper Technologies, Inc. ROP. All these stocks currently carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

In the past 30 days, earnings estimates for these stocks have improved for the current year. Further, earnings surprise for the last reported quarter was 100% for Graham, 4.29% for DXP Enterprises and 0.99% for Roper.

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