Actuant's Top-Line Target Is The Company's Key Risk

Wells Fargo believes Actuant Corporation ATU's top-line target is a key risk; it downgraded the stock to Market Perform from Outperform.

Background, Justification For Downgrade

The company recently outlined its new five-year growth plan including 10 percent sales CAGR, including acquisitions, and 15–20 percent EPS CAGR.

"Reaching this goal is contingent on bolt-on acquisitions, core growth above the market, and end market support. Core growth above the market is our primary concern," senior analyst Allison Poliniak-Cusic wrote in a note.

Related Link: Wells Fargo Downgrades Actuant To Market Perform

Despite acknowledging Actuant's good fundamentals, Poliniak-Cusic said the company's investment in organic growth will take time to show meaningful progress amid significant end-market headwinds. The company's end markets include oil and gas (mainly offshore), agriculture and industrial.

Further, the tepid end-markets could also delay results of the company's efforts to drive long-term revenue growth via expansions in product and service, end market, geographic penetration and increased channel effectiveness.

"Therefore, we are moving to the sidelines and could become more constructive on the name should we see sustained progress in regards to the company's 5-year plan, all else equal," Poliniak-Cusic continued.

It's Not All Negative

The analyst is also encouraged by CEO Randal Baker's greater emphasis on operational excellence to achieve 100bps of annual margin improvement target, which implies a return to mid-teens EBIT percent.

Poliniak-Cusic noted that the company is well poised for a potential recovery in macro-environment, driven by new products, greater penetration and operating leverage.

The analyst, who has a valuation range of $26-$28, noted that management needs to regain investor confidence on the M&A front due to its past missteps.

"An assembler (hence low capital user), ATU is a superb cash flow generator, in our opinion, that uses its cash to deleverage and acquire 'good fit, low risk' bolt-ons," the analyst added.

At last check, Actuant was down 2.92 percent at $23.28.

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