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A Better 2012 Would Be Great For Actuant
Wall Street has already made its early bets on the state of the economy in 2012, and the outlook is not very encouraging. That would be bad news for investors in a diversified industrial mini-conglomerate like Actuant (NYSE:ATU) if not for the fact that Wall Street is often wrong. Although Actuant has recovered nicely from the worst of the recession and does have increasingly challenging comparables ahead, any upside in 2012's economic performance could make this an undervalued industrial play.
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A Good Start to the Fiscal Year
Perhaps this quarter will set the tone for a better-than-expected fiscal year and an undervalued stock getting some love. Actuant reported 23% revenue growth and topped the highest analyst estimate, though core revenue growth was a far more modest 7%. Growth was strong in both the industrial and energy categories, where revenue rose by a low-teens percentage organically. Electrical growth was more modest at 7%, while core growth in the engineered segment was flat.
Actuant did well on profitability. Gross margin improved half a point, with operating income rising 38%. Encouragingly, all of the reporting segments saw higher profits, though margins compressed a bit in the electrical and energy segments. (In this article, we will introduce the components and analysis of operating margins. For more, see Analyzing Operating Margins.)
Is Actuant Late to Some Wild Parties?
In recent times, Actuant has positioned its business toward greater reliance on markets like mining, energy and agriculture. Those have been good markets for broad comparables like SPX (NYSE:SPW), Thomas and Betts (NYSE:TNB), Eaton (NYSE:ETN) and Parker Hannifin (NYSE:PH), but the fear is whether these markets are starting to ebb. After all, the prices of many industrial metals and energy have softened of late, and the economic outlook for 2012 is not exciting.
Likewise, Actuant has done a lot to focus more on the growth opportunities in China and India ... along with most other industrial companies. India's economic performance has not been so robust of late, though, and China has been actively trying to suppress inflation and deal with its own real estate bubbles.
Then again, a pause is not the same as a full stop. It's hard to argue that a bigger exposure to emerging markets won't pay off down the road, and likewise diversification into mining, energy and agriculture seems logical given the world's ongoing needs. (For related reading, see What Is An Emerging Market Economy?)
Whither or Wither Europe?
There's ample reason to be worried about Europe. Major European industrials like Siemens (NYSE:SI) and Atlas Copco have certainly been weak, and Actuant gets about one-third of its revenue from this region. On the plus side, Europe was not a problem in this quarter. Somewhat more ominously though, management does seem concerned that this could be a headwind for the next year.
Will This Stock Get Moving?
It's not hard to find comparables that could lead investors to worry about Actuant. Other power and motion control stocks like Altra Holdings (Nasdaq:AIMC), Emerson (NYSE:EMR), Regal Beloit (NYSE:RBC) and ABB (NYSE:ABB) have been quite weak. As mentioned before, investors are worried about global growth in 2012. They are especially worried about key markets like energy, and there's no geographic area that seems safe from a growth perspective.
Bottom Line
If global CAPEX can stay strong, any and perhaps all of these stocks could rebound in 2012. Actuant is arguably better-placed than many. The balance sheet is fairly clean, and the company's business is well-diversified across markets and products. Perhaps recommending that investors take a look at a dedicated industrial stock like Actuant will go down as a major blunder, but the value is here if the company can maintain just mid-single digit growth in the coming years.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.
Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.
A Good Start to the Fiscal Year
Perhaps this quarter will set the tone for a better-than-expected fiscal year and an undervalued stock getting some love. Actuant reported 23% revenue growth and topped the highest analyst estimate, though core revenue growth was a far more modest 7%. Growth was strong in both the industrial and energy categories, where revenue rose by a low-teens percentage organically. Electrical growth was more modest at 7%, while core growth in the engineered segment was flat.
Actuant did well on profitability. Gross margin improved half a point, with operating income rising 38%. Encouragingly, all of the reporting segments saw higher profits, though margins compressed a bit in the electrical and energy segments. (In this article, we will introduce the components and analysis of operating margins. For more, see Analyzing Operating Margins.)
Is Actuant Late to Some Wild Parties?
In recent times, Actuant has positioned its business toward greater reliance on markets like mining, energy and agriculture. Those have been good markets for broad comparables like SPX (NYSE:SPW), Thomas and Betts (NYSE:TNB), Eaton (NYSE:ETN) and Parker Hannifin (NYSE:PH), but the fear is whether these markets are starting to ebb. After all, the prices of many industrial metals and energy have softened of late, and the economic outlook for 2012 is not exciting.
Likewise, Actuant has done a lot to focus more on the growth opportunities in China and India ... along with most other industrial companies. India's economic performance has not been so robust of late, though, and China has been actively trying to suppress inflation and deal with its own real estate bubbles.
Whither or Wither Europe?
There's ample reason to be worried about Europe. Major European industrials like Siemens (NYSE:SI) and Atlas Copco have certainly been weak, and Actuant gets about one-third of its revenue from this region. On the plus side, Europe was not a problem in this quarter. Somewhat more ominously though, management does seem concerned that this could be a headwind for the next year.
Will This Stock Get Moving?
It's not hard to find comparables that could lead investors to worry about Actuant. Other power and motion control stocks like Altra Holdings (Nasdaq:AIMC), Emerson (NYSE:EMR), Regal Beloit (NYSE:RBC) and ABB (NYSE:ABB) have been quite weak. As mentioned before, investors are worried about global growth in 2012. They are especially worried about key markets like energy, and there's no geographic area that seems safe from a growth perspective.
Bottom Line
If global CAPEX can stay strong, any and perhaps all of these stocks could rebound in 2012. Actuant is arguably better-placed than many. The balance sheet is fairly clean, and the company's business is well-diversified across markets and products. Perhaps recommending that investors take a look at a dedicated industrial stock like Actuant will go down as a major blunder, but the value is here if the company can maintain just mid-single digit growth in the coming years.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.
by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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