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Actuant Gains From Inorganic Moves, Cost Concerns Prevail

On Jan 2, we issued an updated research report on Actuant Corporation ATU. This Zacks Rank #3 (Hold) stock is poised to grow on the back of stellar sales and inorganic moves. However, rising cost remains a major cause of concern.

Let’s dig deeper into the fundamental factors influencing the stock.

Factors Favouring the Stock

In the past four quarters, Actuant’s stock pulled off a positive average earnings surprise of 6.28%. The company is poised to enhance its profitability on the back of favourable end-market conditions, stronger sales, greater operational efficacy and ongoing pricing moves. For fiscal 2019 (ending August 2019), Actuant anticipates to report adjusted earnings of $1.09-$1.20 per share. Per our estimates, the company’s year-over-year earnings growth is currently pegged at 6.4% and 16.4% for fiscal 2019 and fiscal 2020 (ending August 2020), respectively.

Actuant expects that elevated demand for its recently-launched products, strength of Tools business, increased off-highly mobile equipment sales and investments made in core businesses will aid in improving its top-line performances in the quarters ahead. For fiscal 2019, Actuant anticipates to generate revenues of $1.15-$1.19 billion, estimating organic growth of 3-5%. Per our estimates, the company’s year-over-year revenue growth is currently pegged at 1.1% and 3.5% for fiscal 2019 and fiscal 2020, respectively.

Actuant intends to become more competitive on the back of strategic inorganic moves. In sync with this, the company has acquired many businesses and divested some of its existing trading arms in the past few quarters. For instance, the acquisition of Mirage Machines (December 2017) has aided in strengthening the company’s Energy business arm. Also, the Equalizer buyout (May 2018) has fortified the Actuant’s Industrial business. On the other hand, Actaunt has successfully divested its Cortland Fibron business (December 2018), and is currently chalking out plans to spin-off its Cortland US and Precision-Hayes International businesses. By divesting these non-core assets, Actuant intends make new investments towards its best-performing business arms and provide higher returns to shareholders going forward.

Existing Issues

Amid aforementioned positives, we notice that over the past three months, Actuant’s shares have lost 25%, wider than the 18.7% decline recorded by the industry it belongs to.

Material cost inflation has been an issue for Actuant, lately. The Section 232 and 301 tariffs levied over certain U.S. imported products (like steel and aluminium) have significantly escalated raw material expenses for the company. Notably, Actuant believes material cost inflation will adversely impact its business by nearly $10 million in fiscal 2019. Also, implementation of the new set of Tariffs in May 2019 is expected to negatively impact Actuant’s business by another $1 million. Apart from material price inflation, flaring up wage rates and rising freight costs have also been troubling Actuant’s business. Escalating expenses, if unchecked, might dent the company’s profitability in the quarters ahead.

We also notice that weak China-based truck production business and adverse impact of the Viking business divestiture (December 2017) have been affecting the results of Actuant’s Engineered Components & Systems segment. Continuation of these setbacks might depress the company’s aggregate revenues going forward.

Moreover, unfavourable foreign currently translation impact has been dampening Actuant’s revenue performance, of late.  Notably, the company recently trimmed its revenue guidance from $1.21-$1.24 billion to $1.15-$1.19 billion, considering the adverse impact of foreign currency translation and the Cortland Fibron business divestiture.

Also, we notice that on a Price/Earnings (TTM) basis, Actuant’s stock looks overvalued compared to its industry with respective tallies of 17.8x and 14.7x for the past three-month period.

Stocks to Consider

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

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

Atkore International Group Inc. ATKR also carries a Zacks Rank of 1. The company generated a positive average earnings surprise of 27.58% in the trailing four quarters.

iRobot Corporation IRBT flaunts a Zacks Rank of 1. The company delivered a positive average earnings surprise of 102.97% in the last four quarters.

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