Applied Industrial: Invest Cautiously

The way this market's been going, making money from stocks tied to industry has been almost like shooting fish in a barrel. In fact, in the small group of industrial parts and equipment suppliers that I follow, Grainger (NYSE: GWW  ) has been the laggard -- and it's up more than 40% in the past year. So it might be a fair time to ask whether the stock of Applied Industrial Technologies (NYSE: AIT  ) is still a good idea for industrious Fools.

The business is still expanding at a healthy clip. Sales were up a bit more than 11%, but operating income jumped more than 33%. While some of that latter number was due to the timing of incentives, the company is seeing respectable demand and producing strong operating leverage nonetheless.

However, management did make several comments I found interesting. First, the company's not having complete success in passing along price increases. Price hikes contributed about 2%-4% of growth this quarter, versus 3%-5% in the December quarter.

Second, management said that it sees "definite softness" in the business climate, principally due to higher energy prices. Softness here or there isn't a big deal -- economic expansions don't occur in straight lines, nor do all suppliers (or customers) behave in lockstep with each other. But since I didn't hear about this apparent softness from Grainger or MSC Industrial (NYSE: MSM  ) in their latest calls, I find AIT's concerns an interesting development.

Looking ahead, it's hard not to still like the business in which Applied Industrial operates. It's a fragmented market, where selective acquisitions and good service really can make a difference on the bottom line. And agreements like a national distributorship for Parker-Hannifin's (NYSE: PH  ) pneumatics don't hurt.

On the other hand, this stock is no longer what I call cheap -- even with a welcome little boost to guidance and dividends. By the same token, nothing in this sector is exactly what I'd call a bargain these days. So while I don't doubt its future prospects for further growth, I'd be a little cautious about aggressively paying up for these shares. Good markets are important, but so is a price that gives you that margin of safety.

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Fool contributor Stephen Simpson owns shares of MSC Industrial, but has no financial interest in any other stocks mentioned (that means he's neither long nor short the shares).


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