A month has gone by since the las t earnings report for Applied Industrial Technologies (AIT). Shares have added about 8.7% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Applied Industrial Technologies due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recen t earnings report in order to get a better handle on the important drivers.
Applied Industrial Lags on Q2 Earnings, Cuts FY19 View
Applied Industrial reported weaker-than-expected results for the second quarter of fiscal 2019 (ended Dec 31, 2018), with a negative earnings surprise of 6.6%.
Earnings were 99 cents per share, lagging the Zacks Consensus Estimate of $1.06. However, quarterly earnings increased 25.3% from the year-ago tally of 79 cents on the back of solid revenue growth and improved margin profile.
It is worth noting that the FCX buyout added 6 cents per share to the bottom line and 5 cents per share of adverse impact related to LIFO inventory charge.
Acquired Assets and Higher Selling Days Drive Revenues
Applied Industrial's net sales were $840 million in the fiscal second quarter, reflecting 25.9% growth over the year-ago quarter. This improvement was primarily driven by 3.7% organic growth (adjusted for days), 21.3% gain from acquired assets and 1.6% increase from higher selling days. These were partially offset by 0.7% adverse impact of unfavorable movements in foreign currencies.
However, the top line lagged the Zacks Consensus Estimate of $855.4 million by 1.8%.
The company reports revenues under two market segments. A brief discussion of the quarterly results is provided below:
Service Center-Based Distribution's revenues totaled $589 million, representing 70.1% of net revenues in the quarter under review. On a year-over-year basis, the segment's revenues grew 6.1% on the back of 5.3% gain from organic sales and 1.6% benefit from higher selling days. This was partially offset by 0.8% adverse impact of unfavorable movements in foreign currencies.
Fluid Power & Flow Control's segment generated revenues of $251 million, accounting for roughly 29.9% of net revenues in the reported quarter. Sales grew 124.7% year over year, primarily driven by 127.4% gain from acquired assets and 1.7% benefit from higher selling days. This was offset by 4.4% impact of decline in organic sales.
Margin Increases Year over Year
In the reported quarter, Applied Industrial's cost of sales increased 24.7% year over year to $597.2 million. Cost of sales was 71.1% of the quarter's net sales versus 71.8% in the year-ago quarter. Gross margin increased 70 basis points (bps) to 28.9%.
Selling, general and administrative expenses (including depreciation) increased 28.4% year over year to $181.9 million. It represented 21.7% of net sales in the reported quarter versus 21.2% in the year-ago quarter. Operating profit grew 30.5% year over year to $61 million, with year-over-year growth of 30 bps in the margin to 7.3%.
Balance Sheet & Cash Flow
Exiting the fiscal second quarter, Applied Industrial had cash and cash equivalents of $79.8 million, up 41.5% from $56.4 million recorded in the las t report ed quarter. Long-term debt was down 3.1%, sequentially, to $923.4 million.
In the first half of fiscal 2019, the company generated net cash of $65.6 million from operating activities, roughly 209.6% higher than $21.2 million generated in the comparable period a year ago. Capital spent on property purchase totaled $7.1 million versus $11.5 million in the year-ago period.
In the first half of fiscal 2019, Applied Industrial rewarded shareholders by paying approximately $23.3 million as dividends. This amount represents growth of 3.1% from the previous year.
For fiscal 2019 (ending June 2019), Applied Industrial predicts sales growth of 12.5-15%, lower than 16-18% mentioned previously. The forecast has been lowered mainly due to weak demand expected in the technology-based markets in the Fluid Power segment. Organic sales in the year are projected to grow 2-3%.
Earnings per share are anticipated to be $4.45-$4.65, down from $4.65-$4.85 stated earlier. The revision accounts for lower volume and the impact of LIFO charge recorded in the fiscal second quarter. SD&A countermeasures will bring in some relief.
How Have Estimates Been Moving Since Then?
Fresh estimates followed a downward path over the past two months.
At this time, Applied Industrial Technologies has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Applied Industrial Technologies has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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