Applied Industrial currently trades at $243 and has been a dream stock for shareholders. It’s returned 264% since December 2019, more than tripling the S&P 500’s 85.4% gain. The company has also beaten the index over the past six months as its stock price is up 27.5%.

Is there a buying opportunity in Applied Industrial, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Despite the momentum, we're sitting this one out for now. Here are three reasons why there are better opportunities than AIT and a stock we'd rather own.

Why Is Applied Industrial Not Exciting?

Formerly called The Ohio Ball Bearing Company, Applied Industrial (NYSE:AIT) distributes industrial products–everything from power tools to industrial valves–and services to a wide variety of industries.

1. Long-Term Revenue Growth Disappoints

A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Unfortunately, Applied Industrial’s 5.3% annualized revenue growth over the last five years was tepid. This fell short of our benchmark for the industrials sector.

2. Slow Organic Growth Suggests Waning Demand In Core Business

Investors interested in Engineered Components and Systems companies should track organic revenue in addition to reported revenue. This metric gives visibility into Applied Industrial’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.

Over the last two years, Applied Industrial’s organic revenue averaged 5.4% year-on-year growth. This performance was underwhelming and suggests it may need to improve its products, pricing, or go-to-market strategy, which can add an extra layer of complexity to its operations.

3. Free Cash Flow Margin Stuck in Neutral

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

As you can see below, Applied Industrial’s margin was unchanged over the last five years, showing it couldn’t improve. Its free cash flow margin for the trailing 12 months was 9.1%.

Final Judgment

Applied Industrial isn’t a terrible business, but it doesn’t pass our bar. With its shares outperforming the market lately, the stock trades at 24.2× forward price-to-earnings (or $243 per share). At this valuation, there’s a lot of good news priced in - you can find better investment opportunities elsewhere. We’d suggest looking at Cloudflare, one of our top software picks that could be a home run with edge computing.

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