Applied Industrial (AIT)

Industrial products distributor Applied Industrial (NYSE:AIT) met Wall Street’s revenue expectations in Q1 CY2025, with sales up 1.8% year on year to $1.17 billion. Its GAAP profit of $2.57 per share was 6.6% above analysts’ consensus estimates.

Company Overview

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.

Engineered 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.

Competitors in the industrial products and services industry include W.W. Grainger (NYSE:GWW), Fastenal (NASDAQ:FAST), and MSC Industrial Direct (NYSE:MSM).

A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, Applied Industrial grew its sales at a tepid 5.7% compounded annual growth rate. This fell short of our benchmark for the industrials sector and is a tough 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 recent performance shows its demand has slowed as its annualized revenue growth of 2.1% over the last two years was below its five-year trend.

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 that don’t accurately reflect its fundamentals. Over the last two years, Applied Industrial’s organic revenue was flat. Because this number is lower than its normal revenue growth, we can see that some mixture of acquisitions and foreign exchange rates boosted its headline results.

This quarter, Applied Industrial grew its revenue by 1.8% year on year, and its $1.17 billion of revenue was in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 8% over the next 12 months, an improvement versus the last two years. This projection is above the sector average and implies its newer products and services will spur better top-line performance.

Applied Industrial’s gross margin is slightly below the average industrials company, giving it less room to invest in areas such as research and development. As you can see below, it averaged a 29.4% gross margin over the last five years. Said differently, Applied Industrial had to pay a chunky $70.57 to its suppliers for every $100 in revenue.

Applied Industrial produced a 30.5% gross profit margin in Q1, in line with the same quarter last year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

Applied Industrial has managed its cost base well over the last five years. It demonstrated solid profitability for an industrials business, producing an average operating margin of 10%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.

Analyzing the trend in its profitability, Applied Industrial’s operating margin rose by 3.8 percentage points over the last five years, as its sales growth gave it operating leverage.

This quarter, Applied Industrial generated an operating profit margin of 11.1%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Applied Industrial’s EPS grew at an astounding 63.6% compounded annual growth rate over the last five years, higher than its 5.7% annualized revenue growth. This tells us the company became more profitable on a per-share basis 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 was flat this quarter but expanded by 3.8 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 analyze EPS over a shorter period to see if we are missing a change in the business.

For Applied Industrial, its two-year annual EPS growth of 8.2% was lower than its five-year trend. We hope its growth can accelerate in the future.

In Q1, Applied Industrial reported EPS at $2.57, up from $2.48 in the same quarter last year. This print beat analysts’ estimates by 6.6%. Over the next 12 months, Wall Street expects Applied Industrial’s full-year EPS of $9.97 to grow 7.3%.

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.

Applied Industrial has shown decent cash profitability, giving it some flexibility to reinvest or return capital to investors. The company’s free cash flow margin averaged 7.6% over the last five years, slightly better than the broader industrials sector.

Taking a step back, we can see that Applied Industrial’s margin was unchanged during that time, showing its long-term free cash flow profile is stable.

Applied Industrial’s free cash flow clocked in at $122.5 million in Q1, equivalent to a 10.5% margin. This result was good as its margin was 3.8 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, causing temporary swings. Long-term trends carry greater meaning.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Although Applied Industrial hasn’t been the highest-quality company lately, it found a few growth initiatives in the past that worked out wonderfully. Its five-year average ROIC was 18.3%, splendid for an industrials business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Applied Industrial’s ROIC has increased over the last few years. This is a good sign, and if its returns keep rising, there’s a chance it could evolve into an investable business.

Applied Industrial reported $352.8 million of cash and $572.3 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $562.5 million of EBITDA over the last 12 months, we view Applied Industrial’s 0.4× net-debt-to-EBITDA ratio as safe. We also see its $3.09 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was encouraging to see Applied Industrial beat analysts’ EBITDA expectations this quarter. We were also happy its EPS outperformed Wall Street’s estimates. On the other hand, its revenue was in line. Overall, this quarter had some key positives. The stock remained flat at $243.13 immediately following the results.

Updated: May 22, 2025 at 10:08 PM EDT

Before making an investment decision, investors should account for Applied Industrial’s business fundamentals and valuation in addition to what happened in the latest quarter.

Applied Industrial isn’t a terrible business, but it isn’t one of our picks. To kick things off, its revenue growth was uninspiring over the last five years, and analysts don’t see anything changing over the next 12 months. And while its astounding EPS growth over the last five years shows its profits are trickling down to shareholders, the downside is its flat organic revenue disappointed. On top of that, its failed to improve its cash profitability over the last five years.

Applied Industrial’s P/E ratio based on the next 12 months is 20.9x. This valuation tells us a lot of optimism is priced in - we think there are better opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $277.86 on the company (compared to the current share price of $223.01).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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