We issued an updated research report on Actuant Corporation ATU on Jun 7. The industrial tool maker seems well-positioned to gain from its initiatives but some near-term hurdles might be concerning.
The company currently carries a Zacks Rank #3 (Hold) and has a market capitalization of approximately $1.5 billion.
A few growth drivers and certain headwinds, which might influence Actuant, have been discussed below.
Factors Favoring Actuant
Strategic Actions: The company aims to boost its performance on stronger innovation, portfolio-management moves and diligent restructuring initiatives. It anticipates top-line tailwinds from the integration of Hydratight and Enerpac businesses. Also, restructuring initiatives will help in lowering costs through headcount reductions, operational improvements and facility consolidations.
Actuant intends to sell the Engineered Components & Systems segment to develop a sound industrial tool business.
Inorganic Moves: The company seems to favor acquisitions and divestment of businesses to fortify its product portfolio. Mirage Machines, acquired in December 2017, and Equalizer, bought in May 2018, have been strengthening Actuant's energy and industrial businesses, respectively.
The company divested its Cortland Fibron and Precision-Hayes International businesses in December 2018.
Projections: Actuant’s focus on product development, improving operational efficiency and portfolio-restructuring measures are likely to create tailwinds in fiscal 2019. Adjusted earnings per share for the year are predicted to be $1.09-$1.20, above $1.09 recorded in the previous year. Also, core sales are anticipated to grow 3-5%, including 3-5% improvement expected for the Industrial Tools & Services segment and 2-5% for the Engineered Components & Systems segment.
Factors Working Against Actuant
Share Price Movements & Valuation: Market sentiments seem to be working against the company. In the past three months, Actuant’s share price has declined 0.4% against the industry’s growth of 1.4%.
Also, the stock currently seems overvalued compared with the industry, using the Price/Earnings (TTM) valuation method. The stock’s P/E multiple is 19.02, higher than the industry’s multiple of 15.77. Also, the stock is currently trading higher than the industry’s three-month multiple of 17.07. This makes us cautious about the stock.
Top-Line Weakness: The company’s top line in the second quarter of fiscal 2019 suffered from adverse impacts of forex woes as well as divestments of Precision-Hayes International and Cortland Fibron. Performance of the Engineered Components & Systems segment was poor, with sales declining 11.4% year over year.
For the third quarter of fiscal 2019 (ended May 2019), the company predicts sales to be $295-$305 million, lower than $317 million recorded in the year-ago comparable quarter. Revenues for fiscal 2019 will likely be $1.15-$1.19 billion, with the mid-point being roughly flat year over year.
Costs and Tax-Related Woes: Tariffs, commodity cost inflation and other inflationary issues remain a concern for Actuant. In the fiscal second quarter, tariffs had an adverse impact of $2 million on results. The company believes that pricing actions will be helpful to mitigate the adverse impacts of these woes.
In addition, tax rate of 20% in fiscal 2019, higher compared with 10% in the previous year, is likely to dilute earnings by 12 cents.
Stocks to Consider
Some better-ranked stocks in the Zacks Industrial Products sector are Chart Industries, Inc. GTLS, DXP Enterprises, Inc. DXPE and Dover Corporation DOV. While Chart Industries currently sports a Zacks Rank #1 (Strong Buy), DXP Enterprises and Dover 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 all these three stocks have improved for the current year. Further, average earnings surprise for the last four quarters was positive 16.56% for Chart Industries, 48.47% for DXP Enterprises and 8.61% for Dover.
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