Actuant (NYSE:ATU) is a tricky company to evaluate, given a pretty heterogeneous mix of markets and products. Nevertheless, it's following a pretty typical pattern for industrial stocks - slowdowns in Europe and China are pressuring growth and the company is increasingly dependent upon energy to drive near-term results. While Actuant will do alright if global industrial growth picks up as expected later this year, management's own guidance suggests that might not be as likely as the Street has been hoping.
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Respectable Third Quarter Results
Actuant did fine in terms of expected fiscal third quarter results. Revenue rose 9% and more or less matched expectations, with core revenue growth of 4%. Electrical and engineered solutions produced good revenue growth with 7 and 8% respectively, while industrial growth was pretty anemic at 2%. Energy was the star again, with nearly 24% revenue growth.
Margins were an interesting mix. Gross margin fell a not-so-good two points, but SG&A expenses grew just 2% this quarter, allowing operating income to rise nearly 17% and operating margin to expand by a full point. By segment, electrical and energy had the best operating income growth, while engineered solutions was soft.
SEE: Analyzing Operating Margins
Guidance Is a Worry
Figuring out sector and market growth is like trying to build a never-ending jigsaw puzzle and Actuant offers some interesting pieces.
While MRO tools and supplies are not a huge part of Actuant's business, the weak (and below-expectations) growth here seems to corroborate a slowdown in the industry that interim results from Grainger (NYSE:GWW) and Fastenal (Nasdaq:FAST) have also suggested.
Likewise, management's conservatism regarding Europe and China may throw a little cold water on the expected recovery in these markets later this calendar year. With Actuant talking about lower truck production in China and Europe, that's not good news for companies like Eaton (NYSE:ETN) or Cummins (NYSE:CMI), nor is the softness in the auto industry a good development for Illinois Tool Works (NYSE:ITW).
SEE: An Introduction To Sector ETFs
Can Energy Keep Carrying the Load?
A lot of companies, ranging from General Electric (NYSE:GE) to Dover (NYSE:DOV) and Flowserve (NYSE:FLS), have seen their financial results buoyed by strong demand across the energy sector - not only in onshore equipment, but also in offshore, refineries, transport and other sectors.
The question now is how much longer this market can carry the load for Actuant. Luckily, there is still a lot of activity out there. A variety of offshore production platforms are under construction today and more are on the drawing board. Likewise, there's a significant amount of new-build and retooling activity in the offshore equipment market.
SEE: Shifting Focus To Sector Allocation
The Bottom Line
There are not too many straight lines that investors can draw between Actuant and other companies. Some of what Actuant has to say is relevant to companies like Eaton or Illinois Tool Works, some is relevant to Atlas Copco and some is relevant to ABB (NYSE:ABB). This is a good news/bad news situation; Actuant is diversified enough to offer glimpses at the conditions in multiple markets (and across multiple points of the economic cycle), but it's harder to corroborate and extrapolate the data.
Actuant is an interesting industrial mini-conglomerate with a solid specialty in hydraulic tools. Still, it doesn't have a great record of high ROE and it's growth-by-acquisition strategy leaves it vulnerable to overpaying for deals and higher deal prices. Even if Actuant can grow free cash flow at a high single-digit rate over the next decade, these shares aren't compelling enough to buy today as a long-term holding.
At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.
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