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Forget Applied Industrial, Buy These 3 Manufacturing Stocks

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This year has not been a smooth one for Applied Industrial Technologies, Inc. (AIT - Free Report) . The global distributor of value-added industrial products to original equipment manufacturer and maintenance, repair and operations customers has been facing difficult end-market conditions, owing to the coronavirus crisis and other challenges.

Applied Industrial, which presently has a market capitalization of $2.1 billion, has failed to impress investors with its recent financial results. In the fourth quarter of fiscal 2020 (ended June 2020), its adjusted earnings per share declined 21.6% year over year on account of weak sales performance and lower margin.

Year to date, this Zacks Rank #5 (Strong Sell) stock has lost 17.4% compared with the Zacks Manufacturing - General Industrial industry’s decline of 6.1%. The broader Zacks Industrial Products sector has declined 2.4%, while the S&P 500 has jumped 3.6% over the same time frame.

In addition, the Zacks Consensus Estimate for fiscal 2021 (ending June 2021) earnings has trended down from $3.31 to $3.00 on two downward estimate revisions against none upward in the past 60 days. Over the same timeframe, the consensus estimate for fiscal 2022 (ending June 2022) earnings has trended down from $3.76 to $3.70 on one downward estimate revision against none upward.

What is Ailing the Company?

Applied Industrial’s net sales declined 17.9% year over year in fourth-quarter fiscal 2020. Organic sales in the quarter were down 18.4% year over year, owing to weakness in industrial demand due to the pandemic. Further, on a year-over-year basis, organic sales for Service Center-Based Distribution, and Fluid Power & Flow Control segments recorded a decline of 21.1% and 11.8%, respectively.

Owing to the uncertainties regarding the impacts of the pandemic on its operating results, the company refrained from providing financial projections for fiscal 2021. For the first quarter of fiscal 2021 (ended September 2020), it expects organic sales decline of 17-18%, with a fall of mid-teens for Fluid Power & Flow Control and high-teens for Service Center-Based Distribution.

Also, the company’s ability to address financial obligations has declined over the past quarter. Notably, its times interest earned fell from 3.0x in the fiscal third quarter (ended March 2020) to 2.5x in the fiscal fourth quarter. In addition, its cash and cash equivalents balance of $268.6 million do not seem impressive, considering its long-term debt of $855.1 million (exiting fiscal fourth quarter).

In addition, given the company’s extensive geographic presence in North America, Australia, Singapore and New Zealand, its operations are prone to geopolitical risks and unfavorable movements in foreign currencies. In fourth-quarter fiscal 2020, foreign exchange headwinds hurt its top-line performance by 1%.

Our Recommendation

In place of Applied Industrial, we suggest three stocks, belonging to the Zacks Manufacturing - General Industrial industry. These stocks carry a Zacks Rank #2 (Buy) and have strong growth prospects. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Altra Industrial Motion Corp. (AIMC - Free Report) : The Braintree, MA-based company is one of the leading manufacturers and distributors of a diversified range of motion control, electromechanical power transmission and automation products. Year to date, shares of the company have gained 2.1%. The Zacks Consensus Estimate for 2020 earnings has been stable at $2.21 in the past 60 days, while the same for 2021 earnings has increased 0.7% to $2.70.

Altra Industrial is likely to benefit from healthy growth opportunities in factory automation, food processing, robotics and medical equipment markets in the quarters ahead. Also, its solid product portfolio, diversified businesses, pricing actions, cross-selling programs and supply-chain initiatives will be beneficial.

Roper Technologies, Inc. (ROP - Free Report) : Based in Sarasota, FL, Roper specializes in designing, manufacturing, and distributing engineered products and solutions as well as softwares. The stock has rallied 11.6% in the year to date period. In the past 60 days, the Zacks Consensus Estimate for its 2020 earnings has been revised 2% upward to $12.52, and the same for 2021 earnings has moved up 9.3% to $14.40.

The company is poised to benefit from strength across its network software and medical product businesses. Also, acquisitions made by the company over the past few quarters are likely to drive its performance. Moreover, its unique niche market strategy, strong operational execution and cost-control measures are expected to drive margins and profitability.

Dover Corporation (DOV - Free Report) : Based in Downers Grove, IL, Dover is a producer of wide range of specialized industrial products and manufacturing equipment. Although the stock has lost 6% in the year-to-date period, it has gained 11.2% in the past three months. The Zacks Consensus Estimate for current-year earnings has been revised 0.4% upward to $5.21 over the past 60 days, and the same for 2021 earnings has increased 0.5% to $5.84.

The company is well positioned to gain from solid order backlog across its segments, strong growth in biopharma, aerospace & defense, heat exchangers and marking & coding business for the current year. Also, its cost reduction initiatives, acquisitions and execution of margin targets are likely to be beneficial.

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