Applied Industrial currently trades at $276 and has been a dream stock for shareholders. It’s returned 197% since April 2021, more than tripling the S&P 500’s 61.3% gain. The company has also beaten the index over the past six months as its stock price is up 8.2%.

Is now the time to buy Applied Industrial, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Is Applied Industrial Not Exciting?

We’re glad investors have benefited from the price increase, but we're cautious about Applied Industrial. Here are three reasons there are better opportunities than AIT and a stock we'd rather own.

1. Core Business Falling Behind as Demand Plateaus

Investors interested in Engineered Components and Systems companies should track organic revenue in addition to reported revenue. This metric gives visibility into Applied Industrial’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.

Over the last two years, Applied Industrial failed to grow its organic revenue. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests Applied Industrial might have to lean into acquisitions to accelerate growth, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus).

2. Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Applied Industrial’s revenue to rise by 5.1%. Although this projection implies its newer products and services will spur better top-line performance, it is still below average for the sector.

3. Recent EPS Growth Below Our Standards

While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.

Applied Industrial’s unimpressive 5% annual EPS growth over the last two years aligns with its revenue trend. This tells us it maintained its per-share profitability as it expanded.

Final Judgment

Applied Industrial isn’t a terrible business, but it isn’t one of our picks. With its shares topping the market in recent months, the stock trades at 24.4× forward P/E (or $276 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're fairly confident there are better investments elsewhere. Let us point you toward one of Charlie Munger’s all-time favorite businesses.

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