Applied Industrial Technologies, the industrial distribution giant, just released their Q3 2024 earnings transcript, and while the market is focused on the headline numbers, there's a hidden narrative lurking within the text. This narrative, which we're calling "stealth reshoring," might be the key to understanding Applied's future growth trajectory, a factor we believe most analysts have overlooked.

Reshoring, the trend of companies bringing manufacturing operations back to North America, is a well-documented phenomenon. Applied's leadership, in both Q2 and Q3 transcripts, has acknowledged the reshoring trend as a tailwind for their business, particularly within their core Service Center segment. However, we believe the impact of reshoring goes beyond just direct sales to companies engaged in bringing manufacturing back to the U.S. The transcript hints at a more subtle, indirect impact, which could be a more powerful driver of sustained growth.

Here's the clue: Applied is seeing a resurgence of growth in their local customer accounts, a trend they attribute, in part, to increasing demand for conveyance and shop services. This uptick in activity suggests a ripple effect from reshoring. As larger companies bring manufacturing back, they require not only their own internal capacity but also a robust network of local suppliers. These suppliers, often smaller and more localized, are precisely the customer base fueling Applied's local account growth.

This "stealth reshoring" hypothesis is further supported by Neil Schrimsher, Applied's CEO, who, in the Q2 transcript, states, "Local customers are getting pulled into and benefiting from ongoing reshoring because I think some of these larger customers and these global customers are either pulling the work internal or they're finding qualified localized suppliers to help them with." This observation connects the dots directly, suggesting a vibrant ecosystem of local suppliers is being nurtured by the reshoring trend, creating an expanded customer base for Applied.

Growth Trends by Customer Segment

While Applied doesn't break down their revenue by customer size, they do provide insights into growth trends across different customer segments. In the Q3 transcript, they note, "We also began to see some improving growth out of our local customer accounts during the quarter, partially reflecting demand for our conveyance and shop services." This statement, coupled with the Q2 observation about local customers benefiting from reshoring, paints a compelling picture.

Organic Sales Growth Projections

Furthermore, Applied's updated guidance for fiscal 2024 projects organic sales growth of 1.5% to 2.5%, with the midpoint implying a fourth-quarter organic sales per day range of down 1% to up 2%. This guidance, while seemingly conservative, suggests a level of resilience in the face of economic uncertainty. Could this resilience be partially attributed to the steady growth engine of "stealth reshoring," providing a buffer against broader economic headwinds?

The impact of this dynamic extends beyond just the current fiscal year. As reshoring continues to gather momentum, the "stealth reshoring" effect is likely to amplify, creating a virtuous cycle of growth for Applied. This trend could be particularly powerful as Applied expands its automation platform, offering advanced solutions that both large reshoring companies and their local suppliers are likely to embrace.

This "stealth reshoring" narrative, hidden within the earnings transcript, reveals a nuanced understanding of the reshoring trend's impact on Applied's business. It suggests that the growth potential of reshoring goes beyond just direct sales, encompassing a broader ecosystem of local suppliers who are also poised to benefit. This dynamic, we believe, is a critical factor that most analysts are overlooking, making Applied Industrial Technologies a potentially undervalued player in the reshoring boom.

"Fun Fact: The reshoring trend is not just about bringing jobs back to North America. It's also about creating a more resilient and sustainable supply chain. By sourcing goods closer to home, companies can reduce their reliance on long, complex, and often fragile global supply chains."