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On Aug 29, 2013, we upgraded our recommendation on Actuant Corporation (ATU - Analyst Report) to Neutral from Underperform, based on the company’s inorganic growth potential.

Why the Upgrade?

We expect Actuant to grow inorganically in the coming quarters. In fiscal 2012, roughly 8% of the total revenue growth was derived from the company’s acquired assets. Actuant has a strong balance sheet with cash and cash equivalents of $161.4 million as on May 31, 2013. The company also has a strong free cash flow position which is expected to increase further in the coming quarters. Moreover, it expects to generate free cash flow to the tune of $175.0 million in fiscal 2014, excluding the divestiture of the Electrical segment.

In August, Actuant acquired the Scotland-based Viking SeaTech for $225.0 million, paid through the company’s available cash and revolving credit facility. Actuant believes that the similarity of operations of the two companies will lead to great synergies. 

Additionally, Actuant is well positioned to benefit from the rising global energy and infrastructure demand. The company’s operations in the rest of the world (excluding operations in North America and Europe), accounted for roughly 20% of the total sales in the third quarter of fiscal 2013. Actuant believes that it has the potential to increase its sales in the coming quarters. Moreover, core sales are expected to grow by 3%–5% year over year in fiscal 2014.

However, we cannot ignore the fact that Actuant’s Engineered Solutions segment’s revenues registered a year-over-year fall of roughly 10% and is expected to decline further in the coming quarters. Since Actuant operates in over 30 countries globally, it is exposed to currency rate fluctuation risk. Sales in the third quarter of fiscal 2013 declined 1% due to negative foreign currency exchanges. Moreover, the company expects revenues in fiscal 2014 to be hurt by the same along with a higher effective tax rate.

Other Stocks to Consider

Actuant currently carries a Zacks Rank #3 (Hold). Other stocks worth a look in the industry are Alamo Group, Inc. (ALG - Snapshot Report), AGCO Corporation (AGCO - Analyst Report) and Barnes Group Inc. (B - Snapshot Report). While Alamo Group carries a Zacks Rank #1 (Strong Buy), AGCO Corp. and Barnes Group carry a Zacks Rank #2 (Buy).

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