Intrinsic value of Applied Industrial Technologies - AIT

Previous Close

$65.10

  Intrinsic Value

$18.67

stock screener

  Rating & Target

str. sell

-71%

  Value-price divergence*

-71%

Previous close

$65.10

 
Intrinsic value

$18.67

 
Up/down potential

-71%

 
Rating

str. sell

 
Value-price divergence*

-71%

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

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 2.6

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2017(a)
   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, %
  2.98
  7.40
  7.16
  6.94
  6.75
  6.57
  6.42
  6.28
  6.15
  6.03
  5.93
  5.84
  5.75
  5.68
  5.61
  5.55
  5.49
  5.44
  5.40
  5.36
  5.32
  5.29
  5.26
  5.24
  5.21
  5.19
  5.17
  5.16
  5.14
  5.13
  5.11
Revenue, $m
  2,594
  2,786
  2,985
  3,193
  3,408
  3,632
  3,865
  4,108
  4,361
  4,624
  4,898
  5,184
  5,482
  5,793
  6,118
  6,458
  6,812
  7,183
  7,571
  7,977
  8,402
  8,846
  9,312
  9,800
  10,310
  10,846
  11,407
  11,995
  12,611
  13,258
  13,935
Variable operating expenses, $m
 
  2,687
  2,878
  3,076
  3,282
  3,497
  3,720
  3,952
  4,194
  4,446
  4,708
  4,961
  5,246
  5,544
  5,855
  6,180
  6,520
  6,875
  7,246
  7,635
  8,041
  8,467
  8,912
  9,379
  9,868
  10,380
  10,917
  11,480
  12,070
  12,688
  13,337
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
  2,418
  2,687
  2,878
  3,076
  3,282
  3,497
  3,720
  3,952
  4,194
  4,446
  4,708
  4,961
  5,246
  5,544
  5,855
  6,180
  6,520
  6,875
  7,246
  7,635
  8,041
  8,467
  8,912
  9,379
  9,868
  10,380
  10,917
  11,480
  12,070
  12,688
  13,337
Operating income, $m
  176
  99
  108
  117
  126
  135
  145
  156
  167
  178
  190
  223
  235
  249
  263
  277
  293
  308
  325
  343
  361
  380
  400
  421
  443
  466
  490
  515
  542
  569
  598
EBITDA, $m
  215
  142
  152
  162
  173
  185
  197
  209
  222
  235
  249
  264
  279
  295
  311
  329
  347
  366
  385
  406
  428
  450
  474
  499
  525
  552
  580
  610
  642
  675
  709
Interest expense (income), $m
  9
  10
  12
  13
  15
  17
  19
  21
  23
  25
  27
  30
  32
  35
  38
  40
  43
  46
  50
  53
  56
  60
  64
  68
  72
  76
  81
  86
  91
  96
  102
Earnings before tax, $m
  167
  89
  96
  103
  111
  118
  126
  135
  144
  153
  162
  193
  203
  214
  225
  237
  249
  262
  276
  290
  304
  320
  336
  353
  371
  389
  409
  429
  451
  473
  497
Tax expense, $m
  33
  24
  26
  28
  30
  32
  34
  36
  39
  41
  44
  52
  55
  58
  61
  64
  67
  71
  74
  78
  82
  86
  91
  95
  100
  105
  110
  116
  122
  128
  134
Net income, $m
  134
  65
  70
  75
  81
  86
  92
  98
  105
  111
  118
  141
  148
  156
  164
  173
  182
  191
  201
  211
  222
  234
  245
  258
  271
  284
  298
  313
  329
  345
  363

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  105
  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
  1,388
  1,378
  1,476
  1,579
  1,686
  1,796
  1,912
  2,032
  2,157
  2,287
  2,422
  2,564
  2,711
  2,865
  3,026
  3,194
  3,369
  3,553
  3,744
  3,945
  4,155
  4,375
  4,605
  4,846
  5,099
  5,364
  5,641
  5,932
  6,237
  6,557
  6,892
Adjusted assets (=assets-cash), $m
  1,283
  1,378
  1,476
  1,579
  1,686
  1,796
  1,912
  2,032
  2,157
  2,287
  2,422
  2,564
  2,711
  2,865
  3,026
  3,194
  3,369
  3,553
  3,744
  3,945
  4,155
  4,375
  4,605
  4,846
  5,099
  5,364
  5,641
  5,932
  6,237
  6,557
  6,892
Revenue / Adjusted assets
  2.022
  2.022
  2.022
  2.022
  2.021
  2.022
  2.021
  2.022
  2.022
  2.022
  2.022
  2.022
  2.022
  2.022
  2.022
  2.022
  2.022
  2.022
  2.022
  2.022
  2.022
  2.022
  2.022
  2.022
  2.022
  2.022
  2.022
  2.022
  2.022
  2.022
  2.022
Average production assets, $m
  232
  248
  266
  284
  303
  323
  344
  366
  388
  412
  436
  461
  488
  516
  545
  575
  606
  639
  674
  710
  748
  787
  829
  872
  918
  965
  1,015
  1,068
  1,122
  1,180
  1,240
Working capital, $m
  573
  507
  543
  581
  620
  661
  704
  748
  794
  841
  891
  943
  998
  1,054
  1,113
  1,175
  1,240
  1,307
  1,378
  1,452
  1,529
  1,610
  1,695
  1,784
  1,876
  1,974
  2,076
  2,183
  2,295
  2,413
  2,536
Total debt, $m
  292
  334
  383
  434
  487
  542
  599
  659
  721
  785
  853
  923
  996
  1,073
  1,153
  1,236
  1,323
  1,415
  1,510
  1,610
  1,714
  1,823
  1,938
  2,058
  2,183
  2,315
  2,453
  2,597
  2,749
  2,908
  3,074
Total liabilities, $m
  642
  685
  734
  785
  838
  893
  950
  1,010
  1,072
  1,136
  1,204
  1,274
  1,347
  1,424
  1,504
  1,587
  1,674
  1,766
  1,861
  1,961
  2,065
  2,174
  2,289
  2,409
  2,534
  2,666
  2,804
  2,948
  3,100
  3,259
  3,425
Total equity, $m
  745
  693
  743
  794
  848
  904
  962
  1,022
  1,085
  1,150
  1,218
  1,290
  1,364
  1,441
  1,522
  1,606
  1,695
  1,787
  1,883
  1,984
  2,090
  2,201
  2,316
  2,438
  2,565
  2,698
  2,838
  2,984
  3,137
  3,298
  3,467
Total liabilities and equity, $m
  1,387
  1,378
  1,477
  1,579
  1,686
  1,797
  1,912
  2,032
  2,157
  2,286
  2,422
  2,564
  2,711
  2,865
  3,026
  3,193
  3,369
  3,553
  3,744
  3,945
  4,155
  4,375
  4,605
  4,847
  5,099
  5,364
  5,642
  5,932
  6,237
  6,557
  6,892
Debt-to-equity ratio
  0.392
  0.480
  0.520
  0.550
  0.570
  0.600
  0.620
  0.640
  0.660
  0.680
  0.700
  0.720
  0.730
  0.740
  0.760
  0.770
  0.780
  0.790
  0.800
  0.810
  0.820
  0.830
  0.840
  0.840
  0.850
  0.860
  0.860
  0.870
  0.880
  0.880
  0.890
Adjusted equity ratio
  0.499
  0.503
  0.503
  0.503
  0.503
  0.503
  0.503
  0.503
  0.503
  0.503
  0.503
  0.503
  0.503
  0.503
  0.503
  0.503
  0.503
  0.503
  0.503
  0.503
  0.503
  0.503
  0.503
  0.503
  0.503
  0.503
  0.503
  0.503
  0.503
  0.503
  0.503

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  134
  65
  70
  75
  81
  86
  92
  98
  105
  111
  118
  141
  148
  156
  164
  173
  182
  191
  201
  211
  222
  234
  245
  258
  271
  284
  298
  313
  329
  345
  363
Depreciation, amort., depletion, $m
  39
  43
  44
  46
  48
  49
  51
  53
  55
  57
  60
  41
  44
  46
  49
  51
  54
  57
  60
  63
  67
  70
  74
  78
  82
  86
  91
  95
  100
  105
  111
Funds from operations, $m
  153
  108
  114
  121
  128
  136
  144
  152
  160
  169
  178
  182
  192
  202
  213
  224
  236
  248
  261
  275
  289
  304
  319
  336
  353
  370
  389
  409
  429
  451
  473
Change in working capital, $m
  -12
  35
  36
  38
  39
  41
  42
  44
  46
  48
  50
  52
  54
  57
  59
  62
  65
  68
  71
  74
  77
  81
  85
  89
  93
  97
  102
  107
  112
  118
  123
Cash from operations, $m
  165
  73
  78
  84
  89
  95
  101
  108
  114
  121
  128
  130
  138
  146
  154
  163
  172
  181
  191
  201
  212
  223
  235
  247
  260
  273
  287
  302
  317
  333
  350
Maintenance CAPEX, $m
  0
  -21
  -22
  -24
  -25
  -27
  -29
  -31
  -33
  -35
  -37
  -39
  -41
  -44
  -46
  -49
  -51
  -54
  -57
  -60
  -63
  -67
  -70
  -74
  -78
  -82
  -86
  -91
  -95
  -100
  -105
New CAPEX, $m
  -17
  -16
  -18
  -18
  -19
  -20
  -21
  -22
  -22
  -23
  -24
  -25
  -27
  -28
  -29
  -30
  -32
  -33
  -35
  -36
  -38
  -40
  -41
  -43
  -45
  -48
  -50
  -52
  -55
  -58
  -60
Cash from investing activities, $m
  -17
  -37
  -40
  -42
  -44
  -47
  -50
  -53
  -55
  -58
  -61
  -64
  -68
  -72
  -75
  -79
  -83
  -87
  -92
  -96
  -101
  -107
  -111
  -117
  -123
  -130
  -136
  -143
  -150
  -158
  -165
Free cash flow, $m
  148
  36
  38
  41
  45
  48
  52
  55
  59
  63
  67
  66
  70
  74
  79
  84
  89
  94
  99
  105
  111
  117
  123
  129
  136
  143
  151
  159
  167
  175
  184
Issuance/(repayment) of debt, $m
  -36
  47
  49
  51
  53
  55
  57
  60
  62
  65
  67
  70
  73
  77
  80
  83
  87
  91
  95
  100
  104
  109
  114
  120
  126
  132
  138
  145
  152
  159
  167
Issuance/(repurchase) of shares, $m
  -8
  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  
  -58
  47
  49
  51
  53
  55
  57
  60
  62
  65
  67
  70
  73
  77
  80
  83
  87
  91
  95
  100
  104
  109
  114
  120
  126
  132
  138
  145
  152
  159
  167
Total cash flow (excl. dividends), $m
  90
  82
  87
  92
  98
  103
  109
  115
  121
  128
  134
  136
  143
  151
  159
  167
  176
  185
  194
  204
  215
  226
  237
  249
  262
  275
  289
  303
  318
  334
  351
Retained Cash Flow (-), $m
  -87
  -48
  -50
  -52
  -54
  -56
  -58
  -60
  -63
  -65
  -68
  -71
  -74
  -77
  -81
  -84
  -88
  -92
  -96
  -101
  -106
  -111
  -116
  -121
  -127
  -133
  -140
  -146
  -153
  -161
  -169
Prev. year cash balance distribution, $m
 
  100
  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
 
  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 available for distribution, $m
 
  134
  38
  41
  44
  47
  51
  54
  58
  62
  66
  65
  69
  73
  78
  83
  88
  93
  98
  104
  109
  115
  121
  128
  135
  142
  149
  157
  165
  173
  182
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
 
  129
  34
  35
  36
  37
  37
  37
  36
  36
  35
  31
  29
  28
  26
  24
  22
  20
  18
  16
  14
  12
  10
  8
  7
  6
  4
  3
  3
  2
  1
Current shareholders' claim on cash, %
  100
  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 19
Price to Sales 1
Price to Book 3.4
Price to Tangible Book
Price to Cash Flow 15.4
Price to Free Cash Flow 17.2
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 7.4% 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 3.5% 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%.

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 8.9%.

Life of production assets of 11.2 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 18.2%. 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 39.643 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 $2.6 billion.

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COMPANY NEWS

▶ Dividend Yield of W.W. Grainger   [Aug-23-17 12:42PM  Market Realist]
▶ Applied Industrial Technologies posts 4Q profit   [Aug-11-17 09:47PM  Associated Press]
▶ Applied Industrial Technologies posts 3Q profit   [Apr-27-17 06:50AM  Associated Press]
Financial statements of AIT
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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