Hydradyne And IRIS Acquisitions Will Boost Fluid Power Markets

Key Takeaways

• Strategic acquisitions and improved order trends in the automation sector are expected to drive future revenue growth and earnings.
  
• Active M&A and share buybacks, supported by a strong balance sheet, aim to enhance EPS and shareholder value.
  
• Market demand weakness, trade uncertainties, and cautious customer spending could limit revenue and growth, especially in the Engineered Solutions segment.

Catalysts

Distributes industrial motion, power, control, and automation technology solutions in the United States, Canada, Mexico, Australia, New Zealand, Singapore, and Costa Rica.

• The acquisition of Hydradyne is expected to increase financial contributions in the fourth quarter of fiscal 2026, with initial synergies anticipated as demand strengthens across core and emerging fluid power markets. This could positively impact earnings and revenue.
  
• The recent definitive agreement to acquire IRIS Factory Automation is a strategic move for Applied Industrial Technologies that is expected to be incrementally positive for long-term growth, potentially expanding revenue through enhanced cross-selling opportunities and a broadened addressable market.
  
• The company is experiencing an improvement in order trends within its Engineered Solutions segment, with orders increasing year-over-year and sequentially, particularly driven by the automation sector. This is likely to boost future revenue and earnings as these longer-cycle orders convert into sales.
  
• The ongoing focus on internal growth and margin initiatives, such as pricing analytics, supplier relationships, and cost management, is enhancing Applied’s profitability framework, which is expected to lead to expanded net margins and stronger EBITDA margins in future periods.
  
• Applied Industrial Technologies has an active M&A pipeline and is simultaneously executing share buybacks, indicating a strategy to enhance EPS and shareholder value. The company's solid balance sheet provides flexibility for capital allocation to support these initiatives, potentially increasing future earnings.
  

Applied Industrial Technologies Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Applied Industrial Technologies's revenue will grow by 5.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.6% today to 8.9% in 3 years time.
• Analysts expect earnings to reach $466.3 million (and earnings per share of $12.07) by about May 2028, up from $388.6 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.5x on those 2028 earnings, up from 21.6x today. This future PE is greater than the current PE for the US Trade Distributors industry at 19.7x.
• Analysts expect the number of shares outstanding to decline by 1.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.33%, as per the Simply Wall St company report.

Applied Industrial Technologies Future Earnings Per Share Growth

Risks

• Continued market demand weakness and softening OEM fluid power markets have led to sales declines, particularly in the Engineered Solutions segment, which may negatively impact future revenue and limit growth.
  
• Evolving tariff and trade policy uncertainties are creating a volatile environment that could weigh on industrial production and capital spending, thereby affecting revenue and earnings.
  
• Customers' conservative capital management and gradual approach to production could lead to delays in system installs and capital projects, impacting revenue growth and net margins.
  
• Exposure to market fluctuations, such as reduced MRO spending and lower capital maintenance projects, could hinder the company's ability to expand its revenue and affect its margins.
  
• While there are positive signs within certain segments, persistence of order conversions and backlog conversion issues in the Engineered Solutions sector could impact both revenue recognition timelines and overall earnings performance.

Valuation

• The analysts have a consensus price target of $277.857 for Applied Industrial Technologies based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $300.0, and the most bearish reporting a price target of just $250.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $5.3 billion, earnings will come to $466.3 million, and it would be trading on a PE ratio of 26.5x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of $220.69, the analyst price target of $277.86 is 20.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.