APPLIED INDUSTRIAL TECH INC (NYSE:AIT): A Caviar Cruise Quality Stock with Strong EBIT Growth and High ROIC

The Caviar Cruise stock screening strategy is based on quality investing, a disciplined method that focuses on finding companies with lasting competitive strengths, solid profitability, and steady growth. While value investors look for undervalued stocks, quality investors target businesses that can deliver long-term returns, even if they trade at higher valuations. The Caviar Cruise screen uses strict financial filters to identify these companies, highlighting metrics such as revenue and EBIT growth, high returns on invested capital (ROIC), reasonable debt levels, and strong cash flow conversion.

One stock that fits these standards is APPLIED INDUSTRIAL TECH INC (NYSE:AIT). This company, which distributes industrial parts and engineered solutions, shows multiple traits that match the Caviar Cruise approach.

Why AIT Meets the Caviar Cruise Standards

1. Solid EBIT Growth (13.12% 5Y CAGR)
   The Caviar Cruise screen demands EBIT growth of at least 5% per year, confirming that a company’s core operations are growing effectively. AIT’s 13.12% EBIT growth over the past five years reflects not only revenue growth but also better operational efficiency, a sign of pricing strength and scale benefits.

2. Outstanding ROIC (31.24% Excluding Cash & Goodwill)
   ROIC evaluates how well a company produces profits from its invested capital. AIT’s ROIC of 31.24% (excluding cash and goodwill) is well above the screen’s 15% requirement, ranking it as a top performer in its sector. This points to careful capital use and a strong market position.

3. Low Debt Compared to Free Cash Flow (Debt/FCF: 1.30)
   AIT’s debt-to-free-cash-flow ratio of 1.30 means it could pay off all its debt in slightly over a year with its current cash flow. The Caviar Cruise screen prefers companies with a ratio under 5, as lower debt reduces financial risk and improves stability during economic challenges.

4. High Profit Quality (5Y Avg. FCF/Net Income: 311%)
   Profit quality, measured by free cash flow relative to net income, shows how much of a company’s earnings turn into actual cash. AIT’s 311% average over five years is very high, indicating little accounting distortion and strong cash production. While reinvestment can lower this ratio, AIT’s high ROIC confirms that any kept cash is used wisely.

Additional Strengths Beyond the Screen

AIT’s fundamental analysis report further supports its appeal for quality investors:

• Profitability: The company scores 8/10, with top-tier margins (11.17% operating margin) and returns (21.27% ROE).
• Financial Health: AIT earns a 9/10 for solvency and liquidity, backed by a strong Altman-Z score (8.27) and low debt-to-equity ratio (0.31).
• Valuation: While its P/E ratio (27.32) is higher than the industry average, this premium is reasonable given its high profitability and reliability.

Points to Consider

• Slower Growth: Revenue growth has recently eased (0.5% YoY), and future EPS growth is estimated at 5.62% per year, modest for a quality stock.
• Dividend Yield: At 0.70%, AIT is not a high-yield stock, though its payout ratio (15.57%) allows for potential future increases.

Finding Other Quality Stocks

For investors looking for similar high-quality stocks, the Caviar Cruise screen provides a selected list of companies meeting these strict standards.

Disclaimer: This article is for informational purposes only and does not constitute investment advice. Investors should conduct their own research or consult a financial advisor before making decisions.