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Industrial products distributor Applied Industrial Technologies (NYSE:AIT) fell short of analysts’ expectations in Q2 CY2024, with revenue flat year on year at $1.16 billion. It made a GAAP profit of $2.64 per share, improving from its profit of $2.35 per share in the same quarter last year.
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Applied Industrial (AIT) Q2 CY2024 Highlights:
- Revenue: $1.16 billion vs analyst estimates of $1.19 billion (2.1% miss)
- EPS: $2.64 vs analyst estimates of $2.50 (5.6% beat)
- EPS (GAAP) guidance for the upcoming financial year 2025 is $9.58 at the midpoint, missing analyst estimates by 5.9%
- Gross Margin (GAAP): 30.7%, up from 29.2% in the same quarter last year
- EBITDA Margin: 13.2%, up from 12.1% in the same quarter last year
- Free Cash Flow Margin: 10.3%, down from 15% in the same quarter last year
- Organic Revenue fell 2% year on year (8.6% in the same quarter last year)
- Market Capitalization: $7.68 billion
Formerly called The Ohio Ball Bearing Company, Applied Industrial Technologies (NYSE:AIT) distributes industrial products–everything from power tools to industrial valves–and services to a wide variety of industries.
Engineered Components and SystemsEngineered components and systems companies possess technical know-how in sometimes narrow areas such as metal forming or intelligent robotics. Lately, automation and connected equipment collecting analyzable data have been trending, creating new demand. On the other hand, like the broader industrials sector, engineered components and systems companies are at the whim of economic cycles. Consumer spending and interest rates, for example, can greatly impact the industrial production that drives demand for these companies’ offerings.
Sales GrowthA company’s long-term performance can indicate its business quality. Any business can put up a good quarter or two, but many enduring ones tend to grow for years. Unfortunately, Applied Industrial’s 5.2% annualized revenue growth over the last five years was sluggish. This shows it failed to expand in any major way and is a rough starting point for our analysis.
We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Applied Industrial’s annualized revenue growth of 8.4% over the last two years is above its five-year trend, suggesting some bright spots.
We can dig further into the company’s sales dynamics by analyzing its organic revenue, which strips out one-time events like acquisitions and currency fluctuations because they don’t accurately reflect its fundamentals. Over the last two years, Applied Industrial’s organic revenue averaged 8% year-on-year growth. Because this number aligns with its normal revenue growth, we can see the company’s core operations (not M&A) drove most of its performance.
This quarter, Applied Industrial’s $1.16 billion of revenue was flat year on year, falling short of Wall Street’s estimates. Looking ahead, Wall Street expects sales to grow 5% over the next 12 months, an acceleration from this quarter.
Operating MarginOperating margin is a key measure of profitability. Think of it as net income–the bottom line–excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Applied Industrial has done a decent job managing its expenses over the last five years. The company has produced an average operating margin of 9.4%, higher than the broader industrials sector.
Looking at the trend in its profitability, Applied Industrial’s annual operating margin rose by 4.1 percentage points over the last five years, showing its efficiency has improved.
This quarter, Applied Industrial generated an operating profit margin of 12%, up 1.1 percentage points year on year. Since its gross margin expanded more than its operating margin, we can infer that leverage on its cost of sales was the primary driver behind the recently higher efficiency.
EPSWe track the long-term growth in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth was profitable.
Applied Industrial’s EPS grew at an astounding 21.7% compounded annual growth rate over the last five years, higher than its 5.2% annualized revenue growth. This tells us the company became more profitable as it expanded.
Diving into the nuances of Applied Industrial’s earnings can give us a better understanding of its performance. As we mentioned earlier, Applied Industrial’s operating margin expanded by 4.1 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.
Like with revenue, we also analyze EPS over a more recent period because it can give insight into an emerging theme or development for the business. For Applied Industrial, its two-year annual EPS growth of 22.2% is similar to its five-year trend, implying strong and stable earnings power.
In Q2, Applied Industrial reported EPS at $2.64, up from $2.35 in the same quarter last year. This print beat analysts’ estimates by 5.6%. Over the next 12 months, Wall Street expects Applied Industrial to grow its earnings. Analysts are projecting its EPS of $9.82 in the last year to climb by 3.6% to $10.18.
Key Takeaways from Applied Industrial’s Q2 Results It was good to see Applied Industrial beat analysts’ EPS expectations this quarter. On the other hand, its revenue unfortunately missed and its full-year EPS guidance fell short of Wall Street’s estimates. Overall, this was a weaker quarter. The stock remained flat at $197.70 immediately after reporting.
