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On Jul 2, 2013, we downgraded our recommendation on the machinery company, Actuant Corporation (ATU - Analyst Report) to Underperform from Neutral, based on the company’s gloomy future prospects.

Why the Downgrade?

Actuant’s Engineered Solutions segment has been undergoing a difficult phase of operation, harming the total revenue of the company. Core sales in the segment declined 10% year over year in the fiscal third quarter 2013, due to lower volumes. This trend is expected to continue in the near term as well.  

Actuant’s operations are scattered over more than thirty countries worldwide, making it prone to foreign currency exchange risk. Moreover, since the company receives revenues in the currency terms of the region of operations, strengthening of the U.S. dollar makes it difficult for the company’s revenue generation . 

With the divestiture of the Electrical segment combined with higher free cash flow generation, Actuant expects to have roughly $1 billion worth of capital available for deployment, which the company intends to use for future acquisitions. With such a large amount of cash at its disposal, a larger acquisition can be anticipated, which may also increase the potential risks, such as lack of synergy.

Subsequent to the results, Actuant has been facing a downward revision of most of its estimates. Zacks Consensus Estimate for fiscal 2013 declined 13.4% to $1.88 over the last thirty days. For fiscal 2014, the Zacks Consensus Estimate now stands at $2.02, declining 16.2%, over the same timeframe.

Other Stocks to Consider

Not all machinery stocks are performing as poorly as Actuant. Other stocks which are performing better and possess a favorable Zacks Rank include Lincoln Electric Holdings Inc. (LECO - Analyst Report) carrying a Zacks Rank #1 (Strong Buy); also Applied Industrial Technologies, Inc. (AIT - Snapshot Report) and Broadwind Energy, Inc. (BWEN - Snapshot Report) carry a Zacks Rank #2 (Buy), each.

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