A month has gone by since the last earnings report for Applied Industrial Technologies (AIT). Shares have added about 10.7% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Applied Industrial Technologies due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Applied Industrial Q3 Earnings Top Estimates, View Weak
Applied Industrial reported better-than-expected results for third-quarter fiscal 2020 (ended Mar 31, 2020), with earnings surpassing estimates by 2%. However, sales lagged estimates by 2.6%.
The company’s earnings in the fiscal third quarter were $1.02 per share, surpassing the Zacks Consensus Estimate of $1.00. However, quarterly earnings declined 12.1% from the year-ago quarter’s figure of $1.16 on weak sales performance and a decline in margin.
In the reported quarter, Applied Industrial’s net sales amounted to $830.8 million, down 6.2% year over year. The results were adversely impacted by a 9.5% fall in organic sales and 0.2% impact from forex woes, partially offset by 1.9% gain from acquired assets and 1.6% extra day-related benefit.
The company noted that it continues to serve many industries in the present uncertain environment. However, industrial demand suffered in the quarter due to the pandemic.
Also, the company’s top line lagged the Zacks Consensus Estimate of $853.4 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 $574.4 million, which contributed 69.1% to net revenues in the quarter under review. On a year-over-year basis, the segment’s revenues declined 8.9%. Organic sales declined 10.9% and unfavorable movements in foreign currencies had adverse impact of 0.3%. This was partially offset by 1.6% gain from selling days and 0.7% benefit from acquisitions.
Weakness in mining, machinery, oil & gas, transportation, and metals end markets affected the segment’s results. Internationally, business was weak in Mexico and Canada.
The Fluid Power & Flow Control segment generated revenues of $256.4 million, contributing 30.9% to net revenues in the reported quarter. The figure increased 0.5% year over year, driven by 5% gain from acquisitions and 1.6% gain from selling days, partially offset by a 6% decline in organic sales.
Organic sales suffered from weak OEM activities in industrial markets and softness in the flow control market. Project activity was also weak in the quarter.
In the reported quarter, Applied Industrial’s cost of sales declined 5.7% year over year to $594 million. Cost of sales was 71.5% of the quarter’s net sales. Adjusted gross profit in the quarter decreased 6.1% year over year to $240.7 million, while adjusted gross margin rose 10 basis points (bps) year over year to 29%.
Selling, distribution and administrative expenses (including depreciation) decreased 3% year over year to $183.7 million. It represented 22.1% of net sales in the reported quarter versus 21.4% in the year-ago quarter. Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) were $75.9 million, reflecting a year-over-year decline of 10.3%. Margin decreased 50 bps year over year to 9.1%.
Interest expenses declined 11.5% year over year to $8.8 million. Adjusted income tax rate in the quarter was 23.3% versus 24.4% in the year-ago quarter.
Balance Sheet & Cash Flow
Exiting the third quarter of fiscal 2020, Applied Industrial had cash and cash equivalents of $165.5 million, up 29.2% from $128.1 million recorded in the last reported quarter. Long-term debt decreased 1.1% sequentially to $864.8 million.
During the first nine months of fiscal 2020, long-term debt repaid totaled $39.8 million, while borrowings (long-term) were $25 million.
The company generated net cash of $169.6 million from operating activities in the first three quarters of fiscal 2020, up 119.8% from $77.2 million generated in the year-ago period. Capital spent on property purchase totaled $16.2 million compared with $11.7 million in the previous year’s first three quarters. Free cash flow was $153.4 million compared with $65.5 million in the year-ago comparable period.
Applied Industrial rewarded shareholders with a dividend payout of $36.4 million in the first three quarters of fiscal 2020. The amount represents growth of 3.3% year over year.
Applied Industrial noted that worker’s safety, cash generation, satisfaction of customers and maintaining a reliable supply chain are its priorities. Also, certain cost-control measures — including pay reductions, lowering discretionary spending, staff adjustments and others — have been taken to mitigate some financial pressures.
However, industry demand has been adversely impacted by the coronavirus outbreak (with an organic sales decline in April).
The company suspended its projections for fiscal 2020 (ending June 2020) due to the uncertainties caused by the pandemic.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 19.13% due to these changes.
At this time, Applied Industrial Technologies has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top 20% 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 trending upward for the stock, and the magnitude of this revision looks promising. It comes with little surprise Applied Industrial Technologies has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.
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