Intrinsic value of Applied Industrial Technologies - AIT

Previous Close

$76.40

  Intrinsic Value

$21.75

stock screener

  Rating & Target

str. sell

-72%

Previous close

$76.40

 
Intrinsic value

$21.75

 
Up/down potential

-72%

 
Rating

str. sell

We calculate the intrinsic value of AIT stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2017), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 3.0

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046
   2047

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  3.00
  3.20
  3.38
  3.54
  3.69
  3.82
  3.94
  4.04
  4.14
  4.23
  4.30
  4.37
  4.44
  4.49
  4.54
  4.59
  4.63
  4.67
  4.70
  4.73
  4.76
  4.78
  4.80
  4.82
  4.84
  4.86
  4.87
  4.88
  4.90
  4.91
Revenue, $m
  2,672
  2,757
  2,851
  2,951
  3,060
  3,177
  3,302
  3,436
  3,578
  3,729
  3,890
  4,060
  4,240
  4,430
  4,631
  4,844
  5,068
  5,305
  5,554
  5,817
  6,093
  6,385
  6,691
  7,014
  7,354
  7,711
  8,086
  8,481
  8,896
  9,333
Variable operating expenses, $m
  2,577
  2,658
  2,747
  2,843
  2,947
  3,058
  3,177
  3,304
  3,439
  3,582
  3,698
  3,860
  4,031
  4,212
  4,403
  4,605
  4,819
  5,043
  5,280
  5,530
  5,793
  6,070
  6,362
  6,669
  6,991
  7,331
  7,688
  8,063
  8,458
  8,873
Fixed operating expenses, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  2,577
  2,658
  2,747
  2,843
  2,947
  3,058
  3,177
  3,304
  3,439
  3,582
  3,698
  3,860
  4,031
  4,212
  4,403
  4,605
  4,819
  5,043
  5,280
  5,530
  5,793
  6,070
  6,362
  6,669
  6,991
  7,331
  7,688
  8,063
  8,458
  8,873
Operating income, $m
  95
  99
  103
  108
  114
  120
  126
  132
  139
  147
  192
  200
  209
  218
  228
  239
  250
  261
  274
  287
  300
  315
  330
  346
  362
  380
  398
  418
  438
  460
EBITDA, $m
  182
  188
  194
  201
  209
  217
  225
  234
  244
  254
  265
  277
  289
  302
  316
  330
  345
  362
  379
  396
  415
  435
  456
  478
  501
  526
  551
  578
  606
  636
Interest expense (income), $m
  9
  16
  17
  18
  19
  21
  22
  24
  25
  27
  29
  31
  33
  35
  38
  40
  43
  46
  49
  52
  55
  59
  63
  66
  71
  75
  79
  84
  89
  95
  100
Earnings before tax, $m
  79
  82
  85
  89
  93
  98
  102
  107
  112
  118
  161
  167
  174
  180
  188
  196
  204
  212
  222
  231
  241
  252
  263
  275
  287
  300
  314
  329
  344
  360
Tax expense, $m
  21
  22
  23
  24
  25
  26
  28
  29
  30
  32
  43
  45
  47
  49
  51
  53
  55
  57
  60
  62
  65
  68
  71
  74
  78
  81
  85
  89
  93
  97
Net income, $m
  58
  60
  62
  65
  68
  71
  75
  78
  82
  86
  117
  122
  127
  132
  137
  143
  149
  155
  162
  169
  176
  184
  192
  201
  210
  219
  229
  240
  251
  263

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  1,430
  1,475
  1,525
  1,579
  1,637
  1,700
  1,767
  1,838
  1,914
  1,995
  2,081
  2,172
  2,268
  2,370
  2,478
  2,592
  2,712
  2,838
  2,972
  3,112
  3,260
  3,416
  3,580
  3,753
  3,935
  4,126
  4,327
  4,538
  4,760
  4,994
Adjusted assets (=assets-cash), $m
  1,430
  1,475
  1,525
  1,579
  1,637
  1,700
  1,767
  1,838
  1,914
  1,995
  2,081
  2,172
  2,268
  2,370
  2,478
  2,592
  2,712
  2,838
  2,972
  3,112
  3,260
  3,416
  3,580
  3,753
  3,935
  4,126
  4,327
  4,538
  4,760
  4,994
Revenue / Adjusted assets
  1.869
  1.869
  1.870
  1.869
  1.869
  1.869
  1.869
  1.869
  1.869
  1.869
  1.869
  1.869
  1.869
  1.869
  1.869
  1.869
  1.869
  1.869
  1.869
  1.869
  1.869
  1.869
  1.869
  1.869
  1.869
  1.869
  1.869
  1.869
  1.869
  1.869
Average production assets, $m
  505
  521
  539
  558
  578
  600
  624
  649
  676
  705
  735
  767
  801
  837
  875
  916
  958
  1,003
  1,050
  1,099
  1,152
  1,207
  1,265
  1,326
  1,390
  1,457
  1,528
  1,603
  1,681
  1,764
Working capital, $m
  168
  174
  180
  186
  193
  200
  208
  216
  225
  235
  245
  256
  267
  279
  292
  305
  319
  334
  350
  366
  384
  402
  422
  442
  463
  486
  509
  534
  560
  588
Total debt, $m
  311
  332
  355
  380
  407
  436
  467
  500
  535
  573
  613
  655
  699
  746
  796
  849
  905
  963
  1,025
  1,090
  1,158
  1,231
  1,307
  1,387
  1,471
  1,559
  1,652
  1,750
  1,853
  1,961
Total liabilities, $m
  662
  683
  706
  731
  758
  787
  818
  851
  886
  924
  964
  1,006
  1,050
  1,097
  1,147
  1,200
  1,256
  1,314
  1,376
  1,441
  1,509
  1,582
  1,658
  1,738
  1,822
  1,910
  2,003
  2,101
  2,204
  2,312
Total equity, $m
  768
  792
  819
  848
  879
  913
  949
  987
  1,028
  1,071
  1,118
  1,166
  1,218
  1,273
  1,331
  1,392
  1,456
  1,524
  1,596
  1,671
  1,751
  1,834
  1,923
  2,015
  2,113
  2,215
  2,323
  2,437
  2,556
  2,682
Total liabilities and equity, $m
  1,430
  1,475
  1,525
  1,579
  1,637
  1,700
  1,767
  1,838
  1,914
  1,995
  2,082
  2,172
  2,268
  2,370
  2,478
  2,592
  2,712
  2,838
  2,972
  3,112
  3,260
  3,416
  3,581
  3,753
  3,935
  4,125
  4,326
  4,538
  4,760
  4,994
Debt-to-equity ratio
  0.400
  0.420
  0.430
  0.450
  0.460
  0.480
  0.490
  0.510
  0.520
  0.530
  0.550
  0.560
  0.570
  0.590
  0.600
  0.610
  0.620
  0.630
  0.640
  0.650
  0.660
  0.670
  0.680
  0.690
  0.700
  0.700
  0.710
  0.720
  0.720
  0.730
Adjusted equity ratio
  0.537
  0.537
  0.537
  0.537
  0.537
  0.537
  0.537
  0.537
  0.537
  0.537
  0.537
  0.537
  0.537
  0.537
  0.537
  0.537
  0.537
  0.537
  0.537
  0.537
  0.537
  0.537
  0.537
  0.537
  0.537
  0.537
  0.537
  0.537
  0.537
  0.537

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  58
  60
  62
  65
  68
  71
  75
  78
  82
  86
  117
  122
  127
  132
  137
  143
  149
  155
  162
  169
  176
  184
  192
  201
  210
  219
  229
  240
  251
  263
Depreciation, amort., depletion, $m
  87
  89
  91
  93
  95
  97
  99
  102
  105
  107
  74
  77
  80
  84
  88
  92
  96
  100
  105
  110
  115
  121
  126
  133
  139
  146
  153
  160
  168
  176
Funds from operations, $m
  145
  149
  153
  158
  163
  168
  174
  180
  187
  193
  191
  199
  207
  215
  225
  234
  245
  255
  267
  279
  291
  305
  319
  333
  349
  365
  382
  400
  419
  439
Change in working capital, $m
  5
  5
  6
  6
  7
  7
  8
  8
  9
  10
  10
  11
  11
  12
  13
  13
  14
  15
  16
  17
  17
  18
  19
  20
  21
  22
  24
  25
  26
  27
Cash from operations, $m
  140
  144
  147
  152
  156
  161
  166
  172
  178
  184
  181
  188
  195
  203
  212
  221
  230
  240
  251
  262
  274
  286
  299
  313
  327
  343
  359
  375
  393
  411
Maintenance CAPEX, $m
  -49
  -50
  -52
  -54
  -56
  -58
  -60
  -62
  -65
  -68
  -70
  -74
  -77
  -80
  -84
  -88
  -92
  -96
  -100
  -105
  -110
  -115
  -121
  -126
  -133
  -139
  -146
  -153
  -160
  -168
New CAPEX, $m
  -15
  -16
  -18
  -19
  -21
  -22
  -24
  -25
  -27
  -29
  -30
  -32
  -34
  -36
  -38
  -40
  -42
  -45
  -47
  -50
  -52
  -55
  -58
  -61
  -64
  -67
  -71
  -75
  -78
  -82
Cash from investing activities, $m
  -64
  -66
  -70
  -73
  -77
  -80
  -84
  -87
  -92
  -97
  -100
  -106
  -111
  -116
  -122
  -128
  -134
  -141
  -147
  -155
  -162
  -170
  -179
  -187
  -197
  -206
  -217
  -228
  -238
  -250
Free cash flow, $m
  76
  77
  78
  79
  80
  81
  82
  84
  86
  88
  80
  82
  85
  87
  90
  93
  97
  100
  104
  108
  112
  116
  121
  126
  131
  136
  142
  148
  154
  161
Issuance/(repayment) of debt, $m
  19
  21
  23
  25
  27
  29
  31
  33
  35
  37
  40
  42
  45
  47
  50
  53
  56
  59
  62
  65
  69
  72
  76
  80
  84
  88
  93
  98
  103
  108
Issuance/(repurchase) of shares, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  19
  21
  23
  25
  27
  29
  31
  33
  35
  37
  40
  42
  45
  47
  50
  53
  56
  59
  62
  65
  69
  72
  76
  80
  84
  88
  93
  98
  103
  108
Total cash flow (excl. dividends), $m
  95
  98
  101
  104
  107
  110
  113
  117
  121
  125
  120
  124
  129
  135
  140
  146
  152
  159
  165
  173
  180
  188
  197
  205
  215
  225
  235
  246
  257
  269
Retained Cash Flow (-), $m
  -23
  -25
  -27
  -29
  -31
  -34
  -36
  -38
  -41
  -43
  -46
  -49
  -52
  -55
  -58
  -61
  -64
  -68
  -72
  -75
  -79
  -84
  -88
  -93
  -98
  -103
  -108
  -113
  -119
  -125
Prev. year cash balance distribution, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
  5
  5
  6
  6
  6
  6
  6
  7
  7
  7
  7
  8
  8
  8
  9
  9
  10
  10
  11
  11
  12
  12
  13
  13
  14
  15
  15
  16
  17
  18
Cash available for distribution, $m
  73
  74
  74
  75
  75
  76
  77
  79
  80
  82
  74
  75
  78
  80
  82
  85
  88
  91
  94
  97
  101
  104
  109
  113
  117
  122
  127
  132
  138
  144
Discount rate, %
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
  70
  67
  64
  61
  58
  55
  52
  49
  46
  43
  35
  32
  29
  27
  24
  22
  19
  17
  14
  12
  10
  9
  7
  6
  5
  4
  3
  2
  2
  1
Current shareholders' claim on cash, %
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Applied Industrial Technologies, Inc. is an industrial distributor in North America, Australia and New Zealand, serving maintenance, repair and operations (MRO), and original equipment manufacturing customers in various industries. In addition, the Company provides engineering, design, and systems integration for industrial and fluid power applications, as well as customized mechanical, fabricated rubber, and fluid power shop services. It operates in two segments: service center-based distribution and fluid power businesses. The service center-based distribution segment provides customers with a range of industrial products primarily through a network of service centers. The fluid power businesses segment consists of specialized regional companies that distribute fluid power components, design and assemble fluid power systems, and perform equipment repair. The fluid power businesses primarily sell products and services directly to customers rather than through the service centers.

FINANCIAL RATIOS  of  Applied Industrial Technologies (AIT)

Valuation Ratios
P/E Ratio 22.3
Price to Sales 1.1
Price to Book 4
Price to Tangible Book
Price to Cash Flow 18.1
Price to Free Cash Flow 20.2
Growth Rates
Sales Growth Rate 3%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 30.8%
Cap. Spend. - 3 Yr. Gr. Rate -3.2%
Financial Strength
Quick Ratio 21
Current Ratio 0.1
LT Debt to Equity 38.5%
Total Debt to Equity 39.2%
Interest Coverage 20
Management Effectiveness
Return On Assets 10.5%
Ret/ On Assets - 3 Yr. Avg. 7.2%
Return On Total Capital 13.2%
Ret/ On T. Cap. - 3 Yr. Avg. 9.2%
Return On Equity 19.1%
Return On Equity - 3 Yr. Avg. 12.8%
Asset Turnover 1.9
Profitability Ratios
Gross Margin 28.5%
Gross Margin - 3 Yr. Avg. 28.2%
EBITDA Margin 8.3%
EBITDA Margin - 3 Yr. Avg. 7.2%
Operating Margin 6.8%
Oper. Margin - 3 Yr. Avg. 5.7%
Pre-Tax Margin 6.4%
Pre-Tax Margin - 3 Yr. Avg. 5.3%
Net Profit Margin 5.2%
Net Profit Margin - 3 Yr. Avg. 3.5%
Effective Tax Rate 19.8%
Eff/ Tax Rate - 3 Yr. Avg. 38.8%
Payout Ratio 33.6%

AIT stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the AIT stock intrinsic value calculation we used $2594 million for the last fiscal year's total revenue generated by Applied Industrial Technologies. The default revenue input number comes from 2017 income statement of Applied Industrial Technologies. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our AIT stock valuation model: a) initial revenue growth rate of 3% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for AIT is calculated based on our internal credit rating of Applied Industrial Technologies, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Applied Industrial Technologies.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of AIT stock the variable cost ratio is equal to 96.5%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for AIT stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 5.4% for Applied Industrial Technologies.

Corporate tax rate of 27% is the nominal tax rate for Applied Industrial Technologies. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the AIT stock is equal to 0.2%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for AIT are equal to 18.9%.

Life of production assets of 10 years is the average useful life of capital assets used in Applied Industrial Technologies operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for AIT is equal to 6.3%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $745 million for Applied Industrial Technologies - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 39 million for Applied Industrial Technologies is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Applied Industrial Technologies at the current share price and the inputted number of shares is $3.0 billion.

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COMPANY NEWS

▶ A Preview Of Applied Industrial's Q4 Earnings   [Aug-09-18 02:44PM  Benzinga]
▶ Looking At Aiton Caldwell SA (WSE:AIT) From All Angles   [Jun-27-18 08:13AM  Simply Wall St.]
▶ Applied Industrial Technologies: Fiscal 3Q Earnings Snapshot   [Apr-26-18 10:23AM  Associated Press]
▶ Earnings Outlook For Applied Industrial   [Apr-25-18 03:19PM  Benzinga]
▶ Should You Buy Aiton Caldwell SA (WSE:AIT) At This PE Ratio?   [Apr-03-18 10:51AM  Simply Wall St.]
▶ Is Aiton Caldwell SAs (WSE:AIT) ROE Of 13.33% Sustainable?   [Mar-15-18 01:06PM  Simply Wall St.]
▶ Applied Industrial Technologies posts 2Q profit   [06:43AM  Associated Press]
▶ 6 Industrial Stocks Likely to Beat Estimates in Q4   [Jan-19-18 12:50PM  InvestorPlace]
▶ [$$] Applied Industrial Technologies to Buy Harvest-Backed FCX Performance   [Jan-09-18 02:28PM  The Wall Street Journal]
▶ Applied Industrial Technologies posts 1Q profit   [06:37AM  Associated Press]
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