Applied Industrial Technologies, Inc. AIT is well-poised for growth in the coming quarters, courtesy of its improving product line and value-added services. The company's efforts to reward its shareholders handsomely add to its appeal.

Applied Industrial is a distributor of value-added industrial products, including engineered fluid power components, bearings, specialty flow control solutions, power transmission products and miscellaneous industrial supplies. These products are mainly sold to original equipment manufacturers (OEMs) and maintenance, repair and operations customers in Australia, North America, Singapore and New Zealand.

AIT currently carries a Zacks Rank #3 (Hold). In the past year, the stock has gained 64% compared with the industry’s 34.8% growth.

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Let’s discuss the factors that should influence investors to retain this company for the time being.

Business Strength: Applied Industrial is poised for growth on the back of strength across its served markets of food and beverage, primary metals, utilities, transportation, aggregates and technology. The strong position in these markets, sales initiatives and focus on national customer accounts are driving the Service Center Based Distribution segment. The increase in demand for fluid power MRO services across the U.S. manufacturing sector, driven by growing digitization and higher investment in maintenance operations, is supporting the segment’s revenues.

Expansion Initiatives: AIT solidified its product portfolio and leveraged business opportunities through asset additions. In first-quarter fiscal 2025 (ended September 2024), buyouts had a positive impact of 2% on the company's sales. Acquisitions boosted sales by 0.7% and 4.7% for the Service Center-Based Distribution and Engineered Solutions segments in the fiscal fourth quarter, respectively. In May 2024, Applied Industrial acquired Grupo Kopar, thereby enhancing its automation position in North America. 

The acquisitions of Bearing Distributors and Cangro (September 2023) enhanced the company’s footprint and strategic growth initiatives across the U.S. Southeast and upper Northeast regions. The Advanced Motion Systems Inc. (April 2023) buyout expanded its footprint in the upper Northeast region of the United States, while helping to bolster relationships with leading suppliers. The acquisition of Automation, Inc. (November 2022) expanded Applied Industrial’s footprint across key verticals and geographies, while supplementing its value-added services and cross-selling efforts.

Rewards to Shareholders: Applied Industrial has a strong balance sheet that has enabled it to reward its shareholders handsomely through dividend payments and share buybacks. In the first three months of fiscal 2025, it paid out dividends worth $14.2 million, up 4.9% on a year-over-year basis. In fiscal 2024, Applied Industrial rewarded shareholders with dividends of $55.9 million, up 4.6% year over year. The company hiked its quarterly dividend rate by 5.7% in January 2024. In August 2022, its board of directors authorized a new share buyback program to repurchase up to 1.5 million shares of its common stock. As of Sept. 30, 2024, it was left with repurchasing 1,050,000 shares.

Downsides of AIT

Segmental Weakness: Lower sales in the fluid power components, owing to weak demand across off-highway mobile OEM customers, are adversely impacting the performance of the Engineered Solutions segment. Also, softer flow control and automation product sales have been impacting the segment’s performance.

Rising Costs: Applied Industrial has been experiencing rising costs and expenses for a while. During the first quarter of fiscal 2025, the company witnessed a 3.7% year-over-year increase in SG&A expenses (including depreciation). The SG&A expenses, as a percentage of total revenues, climbed 60 basis points to reach 19.3%. This upward trajectory follows a pattern of expense growth in the preceding three quarters, with increases of 2.4%, 5.3% and 3.5%, respectively. Its cost of sales inched up 0.5% in the fiscal first quarter of 2025 due to an increase in compensation cost.

Stocks to Consider

Some better-ranked companies are discussed below.

Graham Corporation GHM currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

GHM delivered a trailing four-quarter average earnings surprise of 101.9%. In the past 60 days, the Zacks Consensus Estimate for Graham’s fiscal 2025 earnings has increased 8.4%.

Crane Company CR presently carries a Zacks Rank #2 (Buy). The company delivered a trailing four-quarter average earnings surprise of 7.6%.

In the past 60 days, the consensus estimate for CR’s 2024 earnings has increased 1.2%.

RBC Bearings Incorporated RBC currently carries a Zacks Rank of 2. RBC delivered a trailing four-quarter average earnings surprise of 2.5%.

In the past 60 days, the consensus estimate for RBC Bearings’ fiscal 2025 earnings has increased 2.3%.

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