Applied Industrial Technologies (NYSE:AIT - News) recently delivered its 8th consecutive positive earnings surprise driven by a strong increase in sales volume. Earnings estimates have been rising off the quarter, sending the stock to a Zacks #2 Rank (Buy).

Based on current consensus estimates, analysts project 13% EPS growth this year and 8% growth next year. On top of this growth, the company offers a dividend that yields a solid 2.2%.

Valuation looks attractive too with shares sporting a PEG ratio of 1.0.

Company Description

Applied Industrial Technologies distributes more than 4 million products, primarily serving the maintenance repair operation (NYSE:MRO - News) and Original Equipment Manufacturer (:OEM) markets in virtually every industry. It focuses on bearings, power transmissions, fluid power, rubber products, linear motion and general maintenance items.

The company is headquartered in Cleveland, Ohio and was founded in 1923. It has a market cap of $1.6 billion.

Second Quarter Results

Applied Industrial Technologies reported better than expected results for the second quarter of its fiscal 2012 on January 25. Earnings per share came in at 56 cents, beating the Zacks Consensus Estimate by 2 cents. It was a 14% increase over the same quarter in 2011.

Net sales rose 8% to $570.4 million, ahead of the Zacks Consensus Estimate of $565.0 million. This was driven primarily by a solid increase in volumes year-over-year.

Gross profit expanded slightly, from 27.2% to 27.3% of net sales, while operating income rose 1%. The company's interest expense declined from $458 million to just $10 million over the same period.

Estimates Rising

Following solid Q2 results, management said that it was encouraged about its business prospects for the remainder of the fiscal year. The company reiterated its 2012 EPS guidance of $2.40-$2.55 on expected sales of $2.35-$2.45 billion.

And analysts raised their estimates for both 2012 and 2013, sending the stock to a Zacks #2 Rank (Buy).

The Zacks Consensus Estimate for 2012 is now $2.52, within guidance, and representing 13% growth over 2011 EPS. The 2013 consensus estimate is currently $2.72, corresponding with 8% EPS growth.

Dividend Rising

The company also recently raised its quarterly dividend by 11% to 21 cents per share. This marked its 3rd increase in 18 months.

And since 2000, the company has hiked it at a compound annual rate of 12%:

It currently yields a solid 2.2%.

Valuation

The valuation picture looks very reasonable for AIT. Shares trade at 14.4x 12-month forward earnings, a discount to its 10-year median of 15.4x.

It sports a PEG ratio of 1.0 based on a consensus long-term growth rate of 14.8%.

The Bottom Line

With strong earnings momentum, stellar growth projections, a solid 2.2% dividend yield and a PEG ratio of 1.0, Applied Industrial Technologies offers attractive total return potential.

Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research and Co-Editor of the Reitmeister Value Investor.

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