Applied Industrial Technologies, Inc. (AIT Quick QuoteAIT - Free Report) seems to have lost its sheen to the end-market challenges caused by the pandemic. Also, cash flow-related uncertainties and forex woes are concerning for the company. Notably, its price performance has been weak and its earnings estimates have been lowered lately, pointing toward bearish sentiments for the stock.

The company is based in Cleveland, OH, and has a market capitalization of $2.3 billion. It belongs to the Zacks Manufacturing – General Industrial industry, which is part of the broader Zacks Industrial Products sector. The industry is currently in the bottom 34% (with the rank of 166) of more than 250 Zacks industries.

The company presently carries a Zacks Rank #5 (Strong Sell).

In the past three months, its shares have gained 8.5% compared with the industry’s growth of 20.6%.

Below we have discussed why it is prudent to avoid Applied Industrial.

Pandemic-Led Headwinds: Applied Industrial’s net sales in fourth-quarter fiscal 2020 (ended Jun 30, 2020) decreased 17.9% from the year-ago quarter, while also lagged the Zacks Consensus Estimate by 3.48%. Organic sales in the quarter were down 18.4% year over year on weakness in industrial demand due to the pandemic. On a segmental basis, organic sales for the two segments — Service Center-Based Distribution, and Fluid Power & Flow Control — were down 21.1% and 11.8% from the year-ago quarter.

The company remains wary of the pandemic-related uncertainties in the quarters ahead and so refrained from providing financial projections for fiscal 2021 (ending June 2021). Also, it expects organic sales to decrease 17-18% — with a decline of mid-teens for Fluid Power & Flow Control and high-teens for Service Center-Based Distribution — for the first quarter of fiscal 2020 (ending September 2020).

The Zacks Consensus Estimate for revenues in the first quarter of fiscal 2021 is pegged at $714.5 million, suggesting a decline of 16.6% from the year-ago reported figure. Also, estimates for fiscal 2021, pegged at $2.96 billion, suggest a decline of 8.7% from the previous year’s reported figure.

Risks From International Operations: The company is exposed to risks — including geopolitical issues, unfavorable movements in foreign currencies and others — arising from international operations. Notably, it has presence in Singapore, Australia, New Zealand and North America.
 
In fourth-quarter fiscal 2020, the company’s sales were lowered to the extent of 1% on forex woes.

Abilities to Address Financial Obligations: The company’s ability to repay financial obligations — long-term debt at the end of fourth-quarter fiscal 2020 was $855.1 million and cash and cash equivalents were just $268.6 million — is concerning. A declining trend is visible in its times interest earned ratio over the past two-three quarters.

Notably, Applied industrial’s times interest earned was 2.5X at the end of the fourth quarter versus 3.0X at the end of the third quarter and 5.7X at the end of both the first and second quarters of fiscal 2020. Also, the company’s fourth-quarter times interest earned is below the industry’s 7.7X.

Earnings Estimate Trend: Applied Industrial’s earnings estimates have been revised downward in the past 30 days. Currently, the Zacks Consensus Estimate for its earnings is pegged at $3.00 for fiscal 2021, reflecting a decline of 9.4% from the 30-day-ago figure. The same for fiscal 2022 (ending June 2022) has declined 1.6% to $3.70 during the same period.