Applied Industrial Poised On Solid Operations, Buyout Gains

We issued an updated research report on Applied Industrial Technologies, Inc. (NYSE:AIT) on Dec 8. We believe that a diversified business structure, initiatives to return higher value to shareholders and inorganic activities makes this stock an attractive choice for investors seeking exposure in the machinery industry.

It currently carries a Zacks Rank #2 (Buy). Its investment appeal is further accentuated by a favorable VGM Score of A.

Applied Industrial’s earnings are projected to grow 12% in the next three to five years. Notably, its earnings estimates for fiscal 2018 (ending June 2018) have been raised by three brokerage firms and that for fiscal 2019 by one. Currently, the Zacks Consensus Estimate is pegged at $3.19 for fiscal 2018 and $3.43 for fiscal 2019, representing growth of 3.6% and 1.8% from their respective tallies 60 days ago.

Also, market sentiments have been positive for Applied Industrial, with the stock yielding 4.1% return in a month’s time. This gain is above 2.6% growth of the S&P 500.

Below we discuss why investors should consider buying Applied Industrial’s stock.

Business Diversification a Boon: Applied Industrial — a leading distributor of industrial products — serves original equipment manufacturer and maintenance, repair and operations customers in various end markets including agriculture, food processing, automotive, chemicals, petrochemicals, fabricated metals, forest products, industrial machinery and equipment, mining, oil and gas, primary metals, transportation, utilities and government entities. Such diversification prevents the company from losses in the event of loss of business from any particular customer. Notably, revenues sourced from any customer do not exceed 3%.

Furthermore, international diversity has played a major role in Applied Industrial’s profitability over time. The company operated in the United States, Puerto Rico, Canada, Mexico, Australia, New Zealand, and Singapore through its 552 facilities at the end of fiscal 2017.

Inorganic Initiatives Drive Growth Opportunities: Acquired assets have over time contributed to Applied Industrial’s expansion. Notably, acquired assets contributed roughly 1.2% to year-over-year sales growth in fiscal 2017, while added 0.8% in first-quarter fiscal 2018.

In fiscal 2017, the company acquired Sentinel Fluid Controls — a premium distributer of lubrication and hydraulic solutions, systems and components. This buyout has been strengthening the company’s Fluid Power segment. Moreover, in the first quarter of fiscal 2018, the company acquired a Mexico-based distributor of components and accessories for lubrication and hydraulic systems. This acquisition is anticipated to fortify the company’s Service Center-Based Distribution segment.

Shareholders’ Return: Share buybacks and dividend payments are the prime means of returning value to shareholders for Applied Industrial. In first-quarter fiscal 2018, the company repurchased 247,500 shares for $13.8 million while authorization to buyback roughly 1.2 million shares was left at the quarter end.

The company’s dividend payments have grown 13.9% (CAGR) since fiscal 2004. In third- quarter fiscal 2017, the company raised its quarterly dividend rate by 3.6% — the eighth hike since 2010.

Over the long term, the company anticipates returning higher value to its shareholders through dividend payments, share buybacks, solid business execution and strategic investments.

Promising Fiscal 2018 Guidance & Long-Term Targets: Applied Industrial anticipates gaining from its strengthening service-center distribution, upstream oil and gas and fluid power operations in the quarters ahead. For fiscal 2018, the company revised its revenue growth guidance from 3-5% to 4-5%, with the mid-point increasing from 4% to 4.5%. Also, earnings are predicted to come within the $3.10-$3.20 per share range, with mid-point increasing from $3.10 to $3.15.

By 2020, the company anticipates generating approximately $3.3 million in revenues, with more than 20% coming in from international operations. In fiscal 2017, the company generated $2.6 billion revenues and sourced 16% of sales from operations outside the United States. Organic revenues are predicted to grow in low-to-mid single digit and acquired assets are expected to contribute in excess of $150 million annually. Also, earnings before interest, tax, depreciation and amortization margin will range within 9-10%, up from 8.3% in fiscal 2017 on the back of sales expansion and cost & operational discipline.

Other Stocks to Consider

Applied Industrial currently carries a market capitalization of $2.5 billion. We believe that the above-mentioned positives clearly justify the stock’s current ranking.

Some other stocks worth considering in the industry are Kadant Inc. (NYSE:KAI) , Sun Hydraulics Corporation (NASDAQ:SNHY) and Altra Industrial Motion Corporation (NASDAQ:AIMC) . While Kadant and Sun Hydraulics sport a Zacks Rank #1 (Strong Buy), Altra Industrial Motion carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Kadant pulled off an average positive earnings surprise of 20.32% in the last four quarters. Also, earnings estimates for 2017 and 2018 were revised upward in the last 60 days.

Sun Hydraulics delivered an average positive earnings surprise of 9.58% in the trailing four quarters. Also, bottom-line expectations for 2017 and 2018 improved over the past 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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