We issued an updated research report on Applied Industrial Technologies, Inc. (AIT - Free Report) on Feb 14.
This industrial distributor currently carries a Zacks Rank #3 (Hold). Its market capitalization is approximately $2.3 billion.
A few growth drivers and certain headwinds, which might influence Applied Industrial, are discussed below.
Factors Favoring Applied Industrial
Acquisitions: Adding businesses to the portfolio has been working in Applied Industrial’s favor over time. Buyouts of Sentinel Fluid Controls (in March 2017), FCX Performance (in January 2018) and Fluid Power Sales (in November 2018) are worth mentioning here. While both Sentinel Fluid Controls and Fluid Power Sales have been strengthening Applied Industrial's Fluid Power business, FCX Performance buyout aided the Specialty Flow Control business.
Notably, acquired assets increased sales for the Fluid Power & Flow Control segment by 127.4% in the second quarter of fiscal 2019 (ended Dec 31, 2018). For fiscal 2019 (ending June 2019), the company predicts that earnings accretion from the FCX Performance buyout will be toward the higher end of 14-24 cents per share.
Shareholder-Friendly Policies: Applied Industrial believes in rewarding shareholders handsomely through dividend payments. In the first half of fiscal 2019 (ended December 2018), the company used approximately $23.3 million to pay dividends to shareholders. This disbursement reflects year-over-year growth of 3.1%. Also, it hiked the quarterly dividend rate by 3.3% in January 2019.
We believe that growth in net income will enable the company to keep rewarding shareholders with dividends.
Long-Term Objectives: Over the long run, Applied Industrial anticipates gaining from solid product line, value-added services, initiatives to drive operational excellence and cost-saving initiatives.
For the five fiscal years (2018-2023), the company anticipates generating revenues of more than $4.5 billion, including organic sales growth in a mid-single digit. Acquired assets are likely to contribute approximately $100 million annually.
Factors Working Against Applied Industrial
Weak Top-Line Guidance: Applied Industrial reported weaker-than-expected results in the second quarter of fiscal 2019 (ended Dec 31, 2018). Earnings and sales lagged estimates by 6.6% and 1.8%, respectively.
For fiscal 2019, the company predicts sales growth of 12.5-15%, lower than 16-18% mentioned earlier. This guidance was lowered mainly due to the anticipation of weak demand from technology-based markets in the Fluid Power segment. For the second half of fiscal 2019, the company anticipates organic sales decline of 5-7% for Fluid Power.
Higher Costs & Expenses Drag: Applied Industrial has been dealing with increasing costs and expenses over time. In the fiscal second quarter, the company’s cost of sales increased 24.7% year over year. LIFO inventory charge adversely impacted gross margin by 32 basis points and earnings by 5 cents per share. Further, acquired assets, annual merit increases, and medical issues led to 28.4% increase in selling, general and administrative expenses.
For fiscal 2019, the company lowered earnings projection from $4.65-$4.85 to $4.45-$4.65, owing to adverse impacts of LIFO charge recorded in the fiscal second quarter and lower volume. SD&A countermeasures are likely to bring in some relief.
Share Price Performance and Earnings Estimates: Market sentiments currently seem to be working against Applied Industrial. The company’s shares price has declined roughly 12.1% in the past three months against the industry’s growth of 0.9%.
In the past 30 days, the company’s earnings estimates for fiscal 2019 and fiscal 2020 (ending June 2020) have been decreased by two brokerage firms. The Zacks Consensus Estimate for earnings is pegged at $4.65 for fiscal 2019 and $5.07 for fiscal 2020, reflecting declines of 2.5% and 1% from the respective 30-day-ago tallies.
Applied Industrial Technologies, Inc. Price and Consensus