Applied Industrial Technologies

(AIT)
Recommendation: Buy
Current Price: $29.47
Intrinsic Value Range: $39 - $44
Potential Upside: 34 - 50%
Adam Sues
UNC Stock Pitch Competition
September 2011

AIT Company Overview

Maintenance, repair, and

operations (MRO) company
focused on industrial market
470 operating facilities & 7
distribution centers
Serves over 2,000 suppliers
Offers over 4m product SKUs

Investment Thesis
Manufacturing output
still below long-term
averages

Outperforming
competition
+
Giving back to
shareholders

Shares down 10% YTD

despite record year in FY
2011

Industry Tailwinds

Shareholder-Friendly
Management

Attractive Valuation

Price Appreciation

Industry Tailwinds
Shareholder's Equity
$700.0

$633.6

$600.0

$555.0
$502.1

$500.0

$508.1

$451.0

2007

$400.0

2008
2009

$300.0

2010
$200.0

2011

$100.0
$2007

2008

2009

2010

2011

Consistent growth despite recession

Revenues correlated to MCU Index

Management Review:
Effective & Shareholder Friendly
0.8

30.00%

45
$0.70

25.89%

44.5

0.7

25.00%

$0.60

$0.60

$0.60

44

0.6

20.00%
15.50%

43.5

$0.48

0.5

15.00%

43

$0.40
9.40%

10.00%

0.4
42.5
0.3

5.00%

42

0.2

0.00%
ROIC

ROE
AIT

DXPE

WCC

ROA

41.5
2006

AXE

2008
Dividends

Officer
D. Pugh

Alignment with shareholders

2007

Shares Held

2009

2010

2011

Shares Outs.

Guideline

% Extra

19,602,593

4,725,000

314.9%

B. Mondics

3,173,136

2,250,000

41.0%

M. Eisele

4,714,550

1,314,000

258.8%

F. Bauer

2,478,848

1,065,000

132.8%

J. Ramras

1,769,318

1,050,000

68.5%

Hidden Value
Balance sheet < true asset value
LIFO Inventory
Branch Real Estate Value

18
16

15.74
12.68

14
P/ Tang BV

AIT - Adjusted Book Value

Tangible Book Value
$ 11.04
+ LIFO Adjustment
$ 3.26
+ Additional Real-Estate Value $ 2.38
Adjusted Book Value
$ 16.68

Price to Tangible Book Value

12

WCC

10

DXPE

AXE

AIT

2.58

1.77

AXE

AIT

Current Stock Price

Adj. P/TangBV

$ 29.47
1.77x

0
WCC

DXPE

SAP implementation costs depressing profitability in short-term

$16.5 - $18.5m in expenses in 2012

Valuation
Projections
Revenue
Sales Growth (%)
Operating Income
Operating Margin (%)
Net Income
Net Income Margin (%)
Basic EPS - Total
Shares Outstanding

2010A

2011A

2012E

2013E

2014E

2015E

2016E

2017E

2018E

2019E

2020E

2021E

$ 1,893.2

$ 2,212.8
16.9%
$ 150.8
6.81%
$ 96.8
4.4%
$ 2.22
43.666

$ 2,389.8
8.0%
$ 167.3
7.0%
$ 105.2
4.4%
$ 2.48
42.356

$ 2,569.1
7.5%
$ 185.0
7.2%
$ 115.6
4.5%
$ 2.81
41.085

$ 2,748.9
7.0%
$ 206.2
7.5%
$ 126.4
4.6%
$ 3.14
40.264

$ 2,913.8
6.0%
$ 218.5
7.5%
$ 138.4
4.8%
$ 3.51
39.458

$ 3,059.5
5.0%
$ 244.8
8.0%
$ 153.0
5.0%
$ 3.96
38.669

$ 3,212.5
5.0%
$ 257.0
8.0%
$ 160.6
5.0%
$ 4.24
37.896

$ 3,341.0
4.0%
$ 267.3
8.0%
$ 167.0
5.0%
$ 4.50
37.138

$ 3,441.2
3.0%
$ 275.3
8.0%
$ 172.1
5.0%
$ 4.73
36.395

$ 3,544.5
3.0%
$ 283.6
8.0%
$ 177.2
5.0%
$ 4.97
35.667

$ 3,650.8
3.0%
$ 292.1
8.0%
$ 182.5
5.0%
$ 5.22
34.954

110.1
5.82%
$
65.6
3.5%
$
1.47
44.629

Free Cash Flow Calculations

$

65.6

$ 105.2

$ 115.6

$ 126.4

$ 138.4

$ 153.0

$ 160.6

$ 167.0

$ 172.1

$ 177.2

$ 182.5

+ depreciation

21.60

$ 22.60

24.2

25.9

27.9

30.0

32.4

34.9

37.7

40.8

44.0

- increase in working capital

$ (90.60)

$ 57.60

26.6

26.9

27.0

24.7

21.9

22.9

19.3

15.0

15.5

16.0

- capex

7.20

$ 20.40

26.0

16.0

17.1

18.1

19.2

20.2

21.3

22.3

23.3

24.4

$ 170.60

$ 41.40

Net income

Free Cash Flow

Present Value

Firm Value (V)

Equity Mkt Value (E)
Debt Market Value (D)
E/V
D/V
Beta
Equity Risk Prem
Risk Free Rate
Cost of Equity (Re)
Spread
Corporate Tax Rate
Cost of Debt (Rd)
WACC

$ 1,237.74
$ 1,190.00
$
47.74
96.1%
3.9%
1.2
6.39%
2.0%
9.6%
2.6%
37.0%
2.9%
9.4%

96.8

$ 76.78
$ 70.18

$ 98.65
$ 82.42

$ 110.27
$ 84.22

Current Price:
$29.47
Price Target:
$39.20 - $44.17
Upside:
34 - 50%

$ 125.49
$ 87.61

$ 144.30
$ 92.08

$ 152.39
$ 88.89

$ 164.24

$ 175.48

$ 87.57

$ 182.42

$ 85.53

$ 189.77

$ 81.27

Terminal Rate - 1% | Discount Rate - 9.4%

Sum of PV of 1-10 Cash Flows
Terminal Value
Excess Cash
Present Value
Shares Outstanding
Per Share Value

47.5

$ 77.28

$ 837.05
$ 919.96
$ 90.09
$ 1,847.10
44.63
$ 41.39

Discount Rates

Terminal
Growth
Rate

0%
0.5%
1%
1.5%
2%

$
$
$
$
$

8%
46.79
48.43
50.31
52.47
55.00

$
$
$
$
$

9.4%
39.20
40.23
41.39
42.69
44.17

$
$
$
$
$

11%
32.95
33.60
34.32
35.10
35.98

Risks to Thesis
Risks

SAP Implementation
Large capital project

Alt View

On-time and on-budget

Temporary earnings
pressure

Retirement of CEO
Experienced management
Led company since 2000
Avg. Tenure: ~20 years

Economic Slowdown
Macroeconomic
pressure

Recurring revenue stream

Repairs cannot be
postponed indefinitely