Reasons Why Investors Should Avoid Applied Industrial Now

Applied Industrial Technologies, Inc. AIT seems to have lost its sheen on account of uncertainties related to the broader industrial cycle and other company-specific headwinds.

The distributor of value-added industrial products currently carries a Zacks Rank #5 (Strong Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The company belongs to the Zacks Manufacturing – General Industrial industry, which is at the bottom 33% (with the rank of 171) of more than 250 Zacks industries. We believe that the industry is suffering from adverse impacts of global uncertainties, unfavorable movements in foreign currencies, softness in the housing market and weakness in industrial production in the United States. Cost escalation due to tariff-related woes as well as commodity inflation, and high labor costs and freight charges are other concerns.

It is worth noting that Applied Industrial reported weaker-than-expected results for fourth-quarter fiscal 2019 (ended Jun 30, 2019), wherein earnings missed the Zacks Consensus Estimate by 14.29%. The bottom line also declined 1% on a year-over-year basis.

A glance at the company’s price trend in the past three months shows that it has lost nearly 6.8% compared with the industry’s and the Zacks Industrial Products sector’s 0.4% and 4.8% decline, respectively. However, the S&P 500 gained 2.4% during the same period.

Its earnings estimates were lowered, reflecting bearish sentiments. Over the past 30 days, the Zacks Consensus Estimate for Applied Industrial’s earnings has decreased 0.9% to $4.36 for fiscal 2020 (ending June 2020) and 0.8% to $4.76 for fiscal 2021 (ending June 2021).

Applied Industrial Technologies, Inc. Price and Consensus

Applied Industrial Technologies, Inc. Price and Consensus

Applied Industrial Technologies, Inc. price-consensus-chart | Applied Industrial Technologies, Inc. Quote

Factors Hurting the Stock’s Performance

Top-Line Weakness: Applied Industrial is cautious about the anticipated uncertainties in the broader industrial cycle in the near term. It predicts sales growth to be within (2%)-2% in fiscal 2020 (ending June 2020) while expects organic sales, adjusted for days, to decline 1-5% over the same period.

In the fourth quarter of fiscal 2019, the company’s sales decreased 1.7% year over year. The top-line results suffered from end-market challenges, especially in fluid power technology.

Cost-Related Concerns: Applied Industrial is exposed to headwinds arising from the undue rise in the cost of sales and operating expenses. Inflation-related woes are worrisome for the company.

In fiscal 2019 (ended Jun 30, 2019), the company’s cost of sales and operating expenses increased 12.6% and 12.8%, respectively. In the fourth quarter, gross margin contracted 30 basis points year over year due to adverse impacts of inflation.

Forex Woes: Geographical diversification exposed Applied Industrial to headwinds arising from geopolitical issues, macroeconomic challenges and unfavorable movements in foreign currencies. Notably, forex woes hurt sales by 0.4% in fourth-quarter fiscal 2019.

Highly-Leveraged Balance Sheet: High debts can be concerning for Applied Industrial as it raises financial obligations and might adversely impact profitability.

The company’s long-term debt rose 46.9% (CAGR) during the last three fiscal years (2017-2019). Exiting fiscal 2019, its long-term debt was approximately $909 million. Net interest expenses in the fiscal year increased 71.1% on a year-over-year basis.

Also, it is worth mentioning here that the company is more leveraged than the industry, with a long-term debt-to-capital ratio of 50.3% and 45.4%, respectively.

Applied Industrial’s Performance Versus Three Peers

Applied Industrial has underperformed its three industry peers — Nordson Corporation NDSN, RBC Bearings Incorporated ROLL and Colfax Corporation CFX — that gained 8%, 2.7% and 7.9%, respectively, in the past three months.

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