On Tuesday, BofA Securities increased its rating on shares of Applied Industrial Technologies (NYSE:AIT) from Neutral to Buy, while also raising the price target to $315 from the previous $285. The revision comes as the analyst expresses greater confidence in the company's mergers and acquisitions (M&A) strategy into the calendar year 2025 and beyond.
Notably, M&A activity has been a significant driver of AIT's earnings per share (EPS) growth over the past ten years, contributing to over 70% of this increase.
AIT recently announced on November 22 that it plans to acquire Hydradyne, a fluid power distributor, for $272 million. This acquisition, valued at 9 times the estimated 2025 enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA), is seen as a reflection of an improving M&A environment and an indicator of potential additional deals in the future.
Despite the softness in end markets and products, the analyst suggests that the rapid historical closure of similar distributor M&A deals—often within the same quarter as their announcement—could help AIT bridge the gap to an anticipated year-over-year cyclical EPS increase by the fourth quarter of the fiscal year 2025, ending in June. The second quarter of the fiscal year 2025 is likely to be the last period of year-over-year declines.
The new price objective of $315 is based on a 19 times multiple of the projected 2026 EV/EBITDA, which is an increase from the previous 17 times multiple. This adjustment places AIT at a premium compared to its peers, which are trading at 17 times their estimated 2025 EV/EBITDA. The justification for the premium multiple is the expected accelerated growth from the company's M&A activities.
In other recent news, Applied Industrial Technologies' acquisition of Hydradyne, LLC, a major fluid power solutions company, is expected to bring in an estimated $260 million in sales and $30 million in EBITDA. The deal, valued at $272 million, is set to close within the current fiscal second quarter of 2025. This acquisition is anticipated to strengthen Applied's Engineered Solutions segment and enhance its footprint in the technical industry.
In relation to earnings, Applied Industrial Technologies reported mixed results in its Q1 FY2025 earnings call. Despite a 3% decline in organic daily sales year-over-year, the company generated a record free cash flow, nearly doubling from the previous year. The company also raised its EPS guidance for FY2025, indicating optimism for market conditions in the latter half of the fiscal year.
Oppenheimer maintained its Outperform rating and a $305.00 price target for Applied Industrial Technologies following the acquisition announcement. Despite some challenges, the company continues to focus on strategic investments and acquisitions to drive future growth.
InvestingPro Insights
Applied Industrial Technologies' recent upgrade by BofA Securities aligns with several key metrics and insights from InvestingPro. The company's strong financial performance is reflected in its market cap of $10.71 billion and a P/E ratio of 28.27, indicating investor confidence in its growth potential.
InvestingPro Tips highlight AIT's impressive track record, noting that it "has raised its dividend for 15 consecutive years" and "has maintained dividend payments for 54 consecutive years." This consistency in dividend growth supports the analyst's positive outlook on the company's financial stability and long-term value creation.
The company's robust performance is further evidenced by its "strong return over the last month" and "large price uptick over the last six months," with a year-to-date price total return of 62.46% as of the latest data. This aligns with the analyst's increased confidence in AIT's growth trajectory, particularly driven by its M&A strategy.
It's worth noting that AIT is "trading near 52-week high" with its price at 98.66% of its 52-week high, which corroborates the analyst's bullish stance. However, investors should be aware that the stock is "trading at a high P/E ratio relative to near-term earnings growth," with a PEG ratio of 4.82 for the last twelve months as of Q1 2025.
For those interested in a more comprehensive analysis, InvestingPro offers 17 additional tips for Applied Industrial Technologies, providing a deeper understanding of the company's financial health and market position.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.