Applied Industrial Prospects Bright Despite High Debt Level

On Dec 30, we issued an updated research report on Applied Industrial Technologies, Inc. (NYSE:AIT) .

Over the past six months, this Zacks Rank #3 (Hold) stock has returned 9.1% compared with the industry’s growth of 6.3%.

Scenario at Present

Applied Industrial has been steadily strengthening its inorganic growth trajectory on acquisitions. In this regard, the buyouts of Sentinel Fluid Controls (in March 2017) and FCX Performance (in January 2018) are worth mentioning. Since its acquisition, Sentinel Fluid Controls has been strengthening Applied Industrial's Fluid Power business while FCX Performance has aided the Specialty Flow Control business. Further, Applied Industrial acquired MilRoc Distribution and Woodward Steel in March 2019. Notably, acquisitions had a positive impact of 2.8% on the company’s sales in the first quarter of fiscal 2020 (ended Sep 30, 2019).

Also, the company remains committed to rewarding shareholders handsomely through dividend payments. In the fiscal first quarter, it used roughly $12 million to pay out dividends to shareholders, reflecting 5.7% growth from the year-ago quarter. In January 2019, Applied Industrial hiked quarterly dividend rate by 3.3%. Growth in net income will likely enable it to keep rewarding shareholders with dividends.

However, the company's long-term debt rose 46.9% (CAGR) in the last three fiscal years (2017-2019). The balance at the end of first-quarter fiscal 2020 was $859.2 million. Though this represents a sequential decline of 5.5%, we believe that further issuances of debt are bound to make Applied Industrial more leveraged. Also, it seems more leveraged than the industry, with long-term debt-to-capital of 48.1% compared with 47.3% for the industry.

Key Picks

Some better-ranked stocks from the same space are Kaman Corporation (NYSE:KAMN) , Barnes Group, Inc. (NYSE:B) and DXP Enterprises, Inc. (NASDAQ:DXPE) . While Kaman currently sports a Zacks Rank #1 (Strong Buy), Barnes Group and DXP Enterprises carry a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Kaman delivered positive earnings surprise of 7.72% on average, in the trailing four quarters.

Barnes Group delivered positive earnings surprise of 4.21% on average, in the trailing four quarters.

DXP Enterprises pulled off positive earnings surprise of 17.67% on average, in the trailing four quarters.

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