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Actuant Combats Energy Market Woes With Portfolio Reshaping

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We have issued an updated research report on Actuant Corporation (ATU - Free Report) on Dec 6. Strengthening Industrial and Engineered Solutions businesses as well as the company’s efforts to reshape its Energy portfolio will prove beneficial. However, the growth momentum might get restricted by headwinds rising from international exposure, industry competition and existing risks in the energy market.

Actuant currently carries a Zacks Rank #3 (Hold).

Below we briefly discuss the company’s potential growth drivers and possible headwinds.

Factors Favoring Actuant

Strengthening Business: Actuant anticipates gaining from its Industrial and Engineered Solutions businesses in the quarters ahead. The Industrial segment primarily serves the general maintenance and repair, industrial, infrastructure and production automation industries, while the Engineered Solutions segment mainly targets transportation markets.

Notably, healthy demand for industrial tools across all key end markets drove the Industrial revenue growth of 6.7% in fourth-quarter fiscal 2017. Also, solid customer production rates in almost all the off-highway markets and solid demand from China’s heavy-duty truck original equipment manufacturers increased Engineered Solutions’ revenues by 18.3%. The company believes that these positives will continue in the quarters ahead as well.

Inorganic Initiatives Drive Growth Opportunities: Acquired assets have over time helped Actuant leverage benefits from easy penetration into unexplored markets and expanded product offerings. In this regard, the recently acquired assets of Mirage Machines — a manufacturer of industrial and energy maintenance tools — from Acteon Group Limited is worth mentioning. The company believes that the addition of Mirage Machines will broaden its product offerings in the flange facing and hot tapping categories. Specifically, the buyout will complement the Energy segment’s Hydratight business and create rental and service business opportunities.

In addition to acquisitions, divestment of non-core assets is Actuant’s another way of strengthening its core businesses. Recently, the company divested its Viking SeaTech business to Acteon Group Limited. The business primarily delivered mooring solutions in the offshore oil & gas exploration, drilling and well development end markets. The company anticipates that the Viking divestment will limit its exposure to upstream, offshore oil & gas markets.

Both these transactions were in sync with Actuant’s intention of streamlining its Energy business to provide superior benefits to shareholders.

Fiscal 2018 Guidance: Actuant anticipates core sales to remain flat to improve 2% in fiscal 2018 compared with 4% decline recorded in fiscal 2017. Results in the first half will likely remain flat while are expected to grow in low single digits in the second half. Total revenues are predicted to come within the $1,100-$1,130 million range, above $1,096 million generated in fiscal 2017.

The company predicts the fiscal year’s earnings per share to come within the $1.05-$1.15 range, above 83 cents in fiscal 2017.

Factors Working Against Actuant

Poor Share Price Performance & Valuation: In the last three months, Actuant’s shares have yielded 6.3% return, underperforming 13.6% growth of the industry.

Also, on a P/E (TTM) basis, Actuant looks overvalued compared with the industry with respective tallies of 32x and 24.5x in the last three-month period. This makes us cautious on the stock.

Adversaries Rising From Energy Segment: Actuant’s Energy segment primarily deals with technical products and services — joint integrity tools & connectors and cable & rope solutions — useful to the energy markets. Popular brands under the segment are Hydratight, Morgrip, Cortland and Jeyco, among others. Notably, in fourth-quarter fiscal 2017, poor upstream offshore oil & gas demand, as well as lower sales accrued from the Hydratight business marred the segment’s sales by 24.9%. The company believes prevalent energy market challenges would continue to dent its growth in the quarters ahead.

Threat From Industry Competition and International Expansion: Actuant faces active competition in each business segment. Extensive business rivalry increases the bargaining power of end users and thus, exposes the company to risks of market share loss. In order to retain competitive power, the company is forced to incur heavy innovation investments, which adds to its aggregate debt level.

In addition, business expansion in foreign nations has exposed Actuant to risks arising from adverse movements in foreign currencies and geo-political issues. In fiscal 2017, the company sourced nearly 56% of its revenues from businesses outside the United States.

Earnings Estimates & Key Picks

Actuant’s earnings estimates for fiscal 2018 (ending August 2018) and fiscal 2019 remained stable in the last 60 days. Currently, the Zacks Consensus Estimate is pegged at $1.08 for fiscal 2018 and $1.32 for fiscal 2019.

Some stocks worth considering in the machinery industry are Kennametal Inc. (KMT - Free Report) , Stanley Black & Decker, Inc. (SWK - Free Report) and Altra Industrial Motion Corporation (AIMC - Free Report) . While Kennametal sports a Zacks Rank #1 (Strong Buy), both Stanley Black & Decker and Altra Industrial Motion carry a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Kennametal’s earnings for fiscal 2018 and fiscal 2019 improved in the last 60 days. Also, the company pulled off an average positive earnings surprise of 20.56% in the last four quarters.

Stanley Black & Decker delivered an average positive earnings surprise of 4.26% in the last four quarters. Also, its earnings estimates for 2017 and 2018 improved in the last 60 days.

Altra Industrial Motion’s financial performance was impressive, with an average positive earnings surprise of 17.30% in the last four quarters. Also, earnings estimates for 2017 and 2018 were revised upward over the last 60 days.

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