We issued an updated research report on Applied Industrial Technologies, Inc. AIT on Jun 20.
The industrial products distributor currently carries a Zacks Rank #3 (Hold) and has a market capitalization of approximately $2.2 billion.
Below we discussed why it will be prudent for investors to hold on to this stock for now.
Factors Favoring Applied Industrial
Strengthening Service Center-Based Distribution Segment: In the third quarter of fiscal 2019 (ended Mar 31, 2019), the Service Center-Based Distribution segment generated roughly 71.2% of Applied Industrial’s revenues. On a year-over-year basis, the segment’s sales grew 4.8% (or 6% organically), backed by growth in business related to the U.S. oil and gas market, strength in the industrial MRO market, improved pricing, and healthy business in the United States and international markets.
For the fourth quarter of fiscal 2019 (ended June 2019), the company anticipates Service Center-Based Distribution segment’s organic sales to grow in a mid-single digit.
Buyouts: Applied Industrial seems to favor acquisitions to fortify its product portfolio. It acquired Sentinel Fluid Controls in March 2017 and FCX Performance in January 2018. While Sentinel Fluid added vigor to the Fluid Power business, the FCX Performance buyout boosted its Specialty Flow Control business. In addition, the company bought Fluid Power Sales in November 2018, and MilRoc Distribution and Woodward Steel in March 2019.
In the third quarter of fiscal 2019, acquired assets positively impacted sales by 6.2%. On a segmental basis, buyouts boosted Fluid Power & Flow Control’s sales by 21.1% and Service Center-Based Distribution’s sales by 0.6%.
Shareholder-Friendly Policies: The company effectively uses capital for rewarding shareholders handsomely through dividend payments. It is worth mentioning here that it increased the quarterly dividend rate by 3.3% in January 2019.
In the first nine months of fiscal 2019 (ended Mar 31, 2019), the company’s dividend payments totaled $35.3 million, reflecting year-over-year growth of 3.1%.
Factors Working Against Applied Industrial
Weakness in Fluid Power & Flow Control Segment: The company’s top line in the third quarter of fiscal 2019 lagged the Zacks Consensus Estimate by 2.67%. Of the two segments, organic sales of the Fluid Power & Flow Control segment in the reported quarter declined 7.5% due mainly to weak demand from technology end markets.
The company predicts weakness to persist in technology end markets for the Fluid Power & Flow Control segment, with its organic sales likely to decline 4-7% in the fiscal fourth quarter.
Forex & Cost Woes: Geographical diversification is reflective of a flourishing business of the company. However, this diversity exposed it to headwinds arising from geopolitical issues and unfavorable movements in foreign currencies. In the third quarter of fiscal 2019, forex woes adversely impacted the company’s sales growth by 0.7%. Persistence of such headwinds will continue impacting its top-line results.
Also, the inflationary environment adversely impacted gross margin in the fiscal third quarter. Increase in selling, general and administrative expenses as well as high interest expenses too adversely impacted results. We believe that rising costs and expenses, if unchecked, will continue to hurt Applied Industrial's profitability in the quarters ahead.
Share Price Performance & Lowered Estimates: In the past three months, the company’s share price has decreased 2.1% against the industry’s growth of 4.7%.
Also, Applied Industrial's earnings estimates for the fourth quarter of fiscal 2019 have been lowered in the past 60 days. The Zacks Consensus Estimate for the same quarter is currently pegged at $1.20, suggesting a decline of 1.6% from the figure mentioned 60 days ago.
Applied Industrial Technologies, Inc. Price and Consensus
Applied Industrial Technologies, Inc. price-consensus-chart | Applied Industrial Technologies, Inc. Quote
Stocks to Consider
Some better-ranked stocks in the industry are Roper Technologies, Inc. ROP, Chart Industries, Inc. GTLS and DXP Enterprises, Inc. DXPE. While Roper and Chart Industries currently sport a Zacks Rank #1 (Strong Buy), DXP Enterprises carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
In the past 30 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 8.43% for Roper, 16.56% for Chart Industries and 48.47% for DXP Enterprises.
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