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Applied Industrial (AIT) Holds Promise Despite Challenges

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Applied Industrial Technologies, Inc. (AIT - Free Report) is benefiting from its efforts to improve the product line, value-added services, initiatives to drive operational excellence and cost-saving efforts. The company’s focus on pricing and cross-selling actions, and growth initiatives are likely to drive its growth. For fiscal 2023, total revenues are expected to increase 13-15% year over year. For the fiscal third quarter, sales are predicted to grow in the low to mid-teen digits.

Applied Industrial’s Service Center Based Distribution segment is benefiting from break-fix MRO activity, sales process initiatives, ongoing pricing actions, secular growth and robust supply-chain investments across the U.S. manufacturing sector. Technical and engineering capabilities, backlog, automation demand, and diverse end-market mix, supporting a favorable growth backdrop are driving the company’s Engineered Solutions segment.

Applied Industrial’s Automation, Inc. buyout (November 2022) expands its footprint across key verticals and geographies while supplementing its value-added services and cross-selling efforts. Its acquisition of R.R. Floody (August 2021) enhanced its product offerings in the automation technology space. Also, its buyout of Gibson (January 2021) added value to its automation solution offerings. Acquisitions positively impacted its sales by 0.5% in second-quarter fiscal 2023.

AIT’s efforts to reward its shareholders through dividend payments and share repurchases are noteworthy. In the first six months of fiscal 2023 (ended December 2022), AIT paid out dividends worth $26.26 million. The company hiked the quarterly dividend rate by 2.9% in January 2023. Also, in August 2022, the company’s board of directors authorized a new share buyback program to repurchase up to 1.5 million shares of its common stock.

However, Applied Industrial has been experiencing raw material inflation, industrial supply-chain issues and labor woes for a while. In second-quarter fiscal 2023, the company's cost of sales increased 21.4% year over year, while selling, distribution and administrative expenses rose 9%.

Given AIT’s extensive presence across international markets, its operations are subject to risks associated with unfavorable movement in foreign currencies and geopolitical issues. Foreign exchange headwinds had an adverse impact of 0.7% on its sales in the fiscal second quarter. In the quarters ahead, Applied Industrial’s overseas business might be depressed by a stronger U.S. dollar.

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In the past six months, this current Zacks Rank #3 (Hold) stock has surged 31.8% compared with the industry’s 20.4% increase.

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