Actuant Hindered by Rising Cost & Weak Energy Business

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On Mar 23, we issued an updated research report on Actuant Corporation ATU. This premium diversified industrial behemoth provides highly engineered motion control solutions, premium hydraulic solutions & tools in more than 30 countries. Moreover, the company provides specialized services and products in the global energy market.

We notice that Actuant has witnessed an average negative earnings surprise of 1.97% over the last four quarters. In second-quarter fiscal 2018 (ended February 2018), the company’s earnings of 13 cents per share missed the Zacks Consensus Estimate by 7.14%. Over the past month, this Zacks Rank #4 (Sell) company has depreciated 6.8%, wider than the 4.5% loss incurred by the industry.

 

What’s Troubling Actuant?

Weaker-than-anticipated profitability has turned out to be a major cause of worry for Actuant.


 

As depicted in the above graph, escalating cost has been pulling down Actuant’s margins for the past few quarters. In the fiscal second quarter, the company’s adjusted gross margin and operating margin contracted 110 and 160 basis points, respectively, year over year. The company noted that costs associated with the ongoing heavy lifting projects, warranty issues, negative sales mix and inflation in certain input prices resulted in the downtrend.

Furthermore, Actuant believes expedited freight, certain maintenance-related expenses, continued inflation, as well as the ongoing engineering and commercial investments will continue to dampen its near-term margins.

Actaunt also expects that persistent customer-maintenance deferrals, scope reductions and push-outs from various end-markets will affect its Energy business. In the fiscal second quarter, the segment’s core sales slipped 8% year over year. This downtrend primarily resulted from lower revenues secured from its Hydratight business.

The company intends to become more competent with bold restructuring moves. However, benefits of these are not anticipated to be experienced any time before fiscal 2019. Notably, these initiatives are currently denting the company’s revenues and profitability. For instance, divestitures and acquisitions dragged down the company’s core sales by 2% in the recently-reported quarter.

Hence, the company lowered its earnings guidance for fiscal 2018 (ending August 2018) to $1.00-$1.10 per share from the prior outlook of $1.05-$1.15 per share.

In addition to the above challenges, other headwinds such as stiff industry rivalry or unfavorable foreign currency fluctuations might impact the company’s near-term performance.

Existing Hopes      

Despite severe margin loss risks, Actuant is poised to boost its profitability on the back of robust top-line performance.

The company anticipates that increased global industrial activity, ongoing commercial effectiveness actions and product roll outs will bolster its Industrial segment revenues. On the other hand, continued sales growth from off-highway equipment markets is expected to drive near-term revenue growth in the Engineered Solutions segment.

Encouragingly, the company raised its sales outlook for fiscal 2018 from $1.10-$1.13 billion to $1.140-$1.160 billion (estimating core sales growth of 2-4%).

Key Picks

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

Axon Enterprise, Inc. AAXN carries a Zacks Rank #2 (Buy). The company pulled off a stellar average positive earnings surprise of 188.33% over the last four quarters. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Acco Brands Corp. ACCO, another Zacks #2 Ranked player, has recorded a remarkable average positive earnings surprise of 82.49% in the preceding four quarters.

Applied Industrial Technologies, Inc. AIT, which also holds a Zacks Rank of 2, witnessed an average positive earnings surprise of 10.97% during the same time frame.

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