Applied Industrial currently trades at $233.89 per share and has shown little upside over the past six months, posting a middling return of 4.9%. However, the stock is beating the S&P 500’s flat performance during that period.
Is now the time to buy Applied Industrial, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Despite the relative momentum, we’re swiping left on Applied Industrial for now. Here are three reasons why you should be careful with AIT and a stock we’d rather own.
Formerly called The Ohio Ball Bearing Company, Applied Industrial (NYSE:AIT) distributes industrial products–everything from power tools to industrial valves–and services to a wide variety of industries.
Investors interested in Engineered Components and Systems companies should track organic revenue in addition to reported revenue. This metric gives visibility into Applied Industrial’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations – non-fundamental factors that can manipulate the income statement.
Over the last two years, Applied Industrial’s organic revenue averaged 2.5% year-on-year growth. This performance was underwhelming and suggests it may need to improve its products, pricing, or go-to-market strategy, which can add an extra layer of complexity to its operations.
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Applied Industrial’s revenue to rise by 6.7%. While this projection indicates its newer products and services will fuel better top-line performance, it is still below the sector average.
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Applied Industrial’s margin dropped by 2 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. Applied Industrial’s free cash flow margin for the trailing 12 months was 8.9%.
