Applied Industrial Technologies Stock Has 20% Upside Potential
- Applied Industrial Technologies is a key supplier of industrial products covering numerous industries.
- AIT reported positive Q3 results and increased guidance.
- AIT's strong revenue and earnings growth can catalyze the stock from its reasonable valuation.
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Applied Industrial Technologies (NYSE:AIT) is one of those companies that remains behind the scenes as opposed to many of the large, well-known high-profile firms. AIT is a mid-cap company with a market cap of $3.69 billion. The company is performing well with the potential for strong future revenue and earnings growth. The stock has a good chance to perform well from a reasonable valuation level as it grows at a steady pace over the long-term.
The company provides a variety of products such as bearings, couplings, electric motors, filtration products, hydraulic products, pneumatic products, conveyor/material handling equipment, power transmission products, paint/coatings, safety products, and other equipment and tools. AIT is also an emerging provider of robotics and machinery automation, which can be a new long-term growth catalyst.
Applied Industrial Technologies serves a wide variety of industries such as: agriculture, food processing, chemicals, cement, fabricated metals, forest products, industrial machinery, life sciences, mining, oil & gas, primary metals, technology, transportation, utilities, and the government. This wide coverage provides the company with long-term stability as it supports many essential functions with its products and services.
AIT distributes its industrial products in Australia, North America, Singapore, and New Zealand. The company has the #1 industry position for fluid power and the #2 position for bearings and power transmission.
AIT's Business Segment Breakdown
AIT categorizes 2 business segments: Service Center Based Distribution and Fluid Power and Flow Control. Both segments reported strong double-digit sales gains in Q3FY22.
The Service Center Based Distribution segment comprises about 67% of total revenue. This segment increased revenue by 13.6% in Q3. The Service Center segment operates through service & distribution centers providing products for the repair/maintenance of motion control and production equipment.
The Fluid Power and Flow Control segment comprises about 33% of total revenue. Revenue for the Fluid & Flow Control segment increased 17.1% in Q3FY22. This segment involves AIT's hydraulic, pneumatic, and other flow control products.
Both segments are growing at strong double-digit paces. This can continue as the company's products are needed by so many industries. AIT's products are needed for essential manufacturing, mining, and distribution operations. The global market for electric motors is expected to grow at 6.7% annually through 2030. The global market for pneumatic cylinders is expected to increase by 5.8% annually through 2030. The market for hydraulics is expected to grow by about 4.2% annually through 2030.
Of course, the big potential driver for the future is the expected annual growth of 38% for the robotic process automation market through 2030. AIT is an emerging provider of robotic and machinery automation products. So, this can be a strong catalyst for the company for multiple years.
Positive Q3 Results
AIT reported a net sales increase of 16.6% to $980.7 million for the quarter over the same period a year ago. Revenue beat expectations by $58.2 million. Normalized EPS increased about 20% to $1.75 from $$1.46 a year ago. EPS beat estimates by $0.25 or 16.7%.
The company experienced strong demand which increased in the 2nd half of the quarter. AIT saw the most strength in the markets for technology, metals, mining, chemicals, utilities, building materials, freight transportation, and machinery. The company is seeing accelerating demand for flow control products. There was also some incremental demand in the natural resources and refinery markets.
These results demonstrate the company's strength in the Q3 FY22 quarter which ended in March. AIT achieved these results even during a period of high inflation and supply chain disruptions. More good news is that AIT is seeing strong demand for its products continuing in the final quarter of its fiscal year.
Given the strength that AIT is achieving, the company increased EPS guidance for the current fiscal year to be $6.15 to $6.25. This is about 6% to 8% higher than the previous range of $5.70 to $5.90. This is a positive catalyst for the stock. Stocks tend to increase as earnings estimates are upgraded as this shows that the company is confident in meeting these expectations.
AIT is expected to grow revenue by 13% to 14% and earnings by 29% for FY22 according to consensus estimates. If the company meets/exceeds its estimates for Q4, the next earnings report (approx. August 12, 2022) could be another positive catalyst for the stock.
Positioning for Growth
AIT made four automation acquisitions over the past three years. These are projected to produce about $150 million in annual sales. This market has the largest expected growth. Therefore, this market can be a strong growth driver for the company going forward.
The focus for automation involves next-generation robotics, machine vision, and industrial networking. This is to be combined with AIT's legacy business of motion control technologies.
AIT is keeping an eye out for future acquisitions to further expand the automation, fluid power, and flow control offerings. The focus is to acquire businesses that can produce double-digit returns on capital and enhance its competitive position. AIT ultimately aims to increase its growth potential for the long-term.
Balance Sheet/Cash Flow/Returns
Applied Industrial Technologies has some strong metrics across the board. AIT has a strong balance sheet with 1.9x more total assets than total liabilities and 2.8x more current assets than current liabilities. The strong balance sheet has the company in a good position to handle long and short-term debt.
AIT's cash flow is also solid. Over the past 12 months, AIT generated $172 million in operating cash flow and had $90 million in levered free cash flow and $107.8 million in unlevered free cash flow. The strong positive cash flow gives the company flexibility to simultaneously invest in the business, to buy back shares, pay dividends, and to pay down debt.
The company generates strong profitability returns. AIT has an ROE of 23%, an ROIC of 11.4%, and an ROA of about 10%. These strong double-digit returns help drive AIT's above-average earnings growth.
AIT is valued reasonably with a forward PE of about 17 and a PEG ratio of 1.15. The PEG ratio is based on the forward looking 3 - 5 year average annual earnings growth of 15%. The growth stocks that I cover tend to perform well when the PEG is below 2 and when the company has positive catalysts and no significant negative catalysts which is the case with AIT.
AIT trades attractively below the Industrial Distribution industry's forward PE of 23 and PEG ratio of 1.96. So, the stock has plenty of upside potential which can be catalyzed by its strong revenue and earnings growth.
The weekly chart above shows the RSI above the 50 level, which is bullish. The stock price has been holding above the 50-day moving average and has been holding up better than the S&P 500 (SPY) over the past 6 months. The green MACD line is about even with the red signal line. The money flow [CMF] has been rising from a low point towards the zero line. Watch for the green MACD line to cross above the red signal line and the CMF to cross above zero for a new bullish trend to emerge.
Applied Industrial Technologies Long-Term Outlook
AIT is showing strength for many of its products. I like how the company is getting into the high-growth robotic and machinery market. This market can help drive strong future growth for AIT for multiple years. Investors should watch for future acquisitions which could include the robotic/machinery market.
The stock's valuation is attractive, leaving plenty of room for further price appreciation. AIT's above-average revenue and earnings growth are positive catalysts to drive the stock higher. Analysts have a one-year price target of $122 for the stock which represents a 20% increase over the current price. This looks reasonable as it would take the PE to about 18.7 based on expected EPS of $6.54 for FY23.
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This article was written by
Through diligent analysis, he is ranked in the top 1% of blogging analysts on Tipranks.com for performance and accuracy. David previously contributed to Kirk Spano's Margin of Safety Investing [MoSI] Marketplace Service and Risk Research Inc.
David focuses on growth & momentum stocks that are reasonably priced and likely to outperform the market over the long-term. He is a long term investor of quality stocks and uses options for strategy.
David told investors to buy in March 2009 at the bottom of the financial crisis. The S&P 500 increased 367% and the Nasdaq increased 685% from 2009 through 2019.
He wants to help make people money by investing in high-quality growth stocks.
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