Actuant Gains From Solid Sales, Rising Cost Remains A Drag

On Nov 27, we upgraded Actuant Corporation (NYSE:ATU) to a Zacks Rank #3 (Hold) from a Zacks Rank #4 (Sell). Going by the Zacks model, companies holding a Zacks Rank #3 have chances of performing in line with the broader market over the next one to three months.

What’s Favoring the Stock?

U.S. manufacturing output marked its fifth straight monthly hike this October, as factory activities in the space, significantly gained steamed. Of late, the American manufacturing companies have been largely buoyed by sturdy domestic economic conditions. Economic policies adopted by the Trump administration, including the December-enacted corporate-tax overhaul and impetus to streamline business regulations, helped boost corporate spending for most of these companies.

We notice that Actuant’s revenues improved 7.9% in fiscal 2018 (ended August 2018), on the back of robust demand from almost all end-market sales. In fiscal 2019 (ending August 2019), the company expects that sales of its Industrial Tools & Services segment will be up 3-5% year over year, including mid-single-digit growth in both the first and the second half of the fiscal. On the other hand, the Engineered Components & Systems segment’s top-line performance is anticipated to improve 2-5%, including low-single-digit growth in the first half and mid-single-digit growth in the second half. For fiscal 2019, the company currently expects revenues of $1.21-$1.24 billion, reflecting year-over-year growth of 3-5%. Per our estimates, Actuant’s year-over-year revenue growth is currently pegged at 3.6% and 4.2% for fiscal 2019 and 2020 (ending August 2020), respectively.

Additionally, Actuant intends to become more competitive on the back of strategic inorganic moves. In sync with this, the company has made several buyouts and undertaken divestitures in the past couple of months. For instance, the acquisition of Mirage Machines in second-quarter fiscal 2018 (ended August 2018) helped strengthen the company’s Energy business arm. Also, Equalizer buyout in the third quarter of fiscal 2018 (ended August 2018) fortified the company’s Industrial segment. On the other hand, in a bid to limit its exposure to upstream oil & gas market (offshore), Actuant divested its Viking business in the fiscal third quarter. The company lately notified its interest to divest Cortland Fibron business, as it is less suitable for the Industrial Tools & Services segment’s growth.

Existing Issues

Despite the aforementioned positives, Actuant’s stock has underperformed and looks overvalued compared to its industry for the past three-month period. During this time frame, the stock has rallied 8.6%, lesser than 13.4% growth recorded by the industry it belongs to.

On the other hand, the stock's P/E multiple is currently pegged at 22.9x, way higher than the industry's multiple of 15.7x.

Escalating costs have been an issue for Actuant, of late. The company’s cost of revenues flared up 7.2% year over year in fourth-quarter fiscal 2018. Actuant perceives that inflation in the prices of major inputs like steel and aluminium (on account of tariffs), upbeat labor cost and flaring up freight charges might escalate costs, and dampen its profitability in the quarters ahead. Moreover, the company noted that increase in tax rate from 10% in fiscal 2018 to 20% in fiscal 2019 will dilute its earnings by 12 cents in fiscal 2019. Including this impact, for fiscal 2019, Actuant anticipates adjusted earnings per share of $1.09-$1.20.

For fiscal 2019, the company projects adjusted earnings per share of $1.09-$1.20. This projection includes the impact of 12 cents per share, relating to the increase in tax rate from 10% in fiscal 2018 to 20% in fiscal 2019.

Furthermore, weakening China-based truck production business is feared to hurt Actuant’s revenues in fiscal 2019. Also, a stronger U.S. dollar may depress its overseas business performance.

Stocks to Consider

Some better-ranked stocks in the Zacks Industrial Products sector are listed below:

DXP Enterprises, Inc. (NASDAQ:DXPE) sports a Zacks Rank #1 (Strong Buy), currently. The company pulled off an impressive positive average earnings surprise of 112.62% in the last four quarters. You can see the complete list of today’s Zacks #1 Rank stocks here.

Energy Recovery, Inc. (NASDAQ:ERII) carries a Zacks Rank #2 (Buy), at present. The company delivered an outstanding positive average earnings surprise of 204.17% in the preceding four quarters.

Applied Industrial Technologies, Inc. (NYSE:AIT) also holds a Zacks Rank of 2. The company came up with a positive average earnings surprise of 11.67% in the trailing four quarters.

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