SHYF - Alamo Group: An Attractive Prospect With A Niche Focus

Summary

• Alamo Group has a history of attractive sales, profit, and cash flow growth.
• The trend for the company for the first three quarters of 2022 was positive as well, thanks to management's efforts.
• On top of this, the company's shares are fairly attractive, both on an absolute basis and relative to similar firms.

Long gone are the days of doing everything by hand. Many of the activities that we engage in today are done by equipment, both because it is cheaper and because it's the only solution for such a large and complex global society and economy. Examples of this include the agricultural industry and various industrial activities. One company that's dedicated to helping on this front is Alamo Group ( ALG ). Fundamentally speaking, the picture for the business has been somewhat mixed as of late. But the overall trajectory for the company has been positive over the prior few years. Add on top of this how cheap shares currently are, and I would make the case that there is some upside to be had for long-term, value-oriented investors.

Propelling value

According to the management team at Alamo Group, the company is a leading producer and servicer of high-quality vegetation management and infrastructure maintenance equipment. These specific products it produces consist of tractor-mounted and self-propelled mowers, zero-turn mowers, agricultural implements, tree and branch chippers, forestry and wood recycling equipment, street and parking lot sweepers, leaf and debris collection equipment, pothole patchers, vacuum trucks, hydro-excavation equipment, telescopic boom excavators, and even snow removal equipment. The company achieves the production and sale of all of these products through the 29 different plants that it has spread across North America, South America, Europe, and even Australia. And it makes its products available mostly through a network of independent dealers and distributors for government, independent contractor, and agricultural and commercial turf market end-users.

Based on data from the company's 2021 fiscal year, which is the most recent year for which complete 52-week data is available, approximately 60.9% of its revenue came from vegetation management activities. Meanwhile, the industrial equipment produced by the company accounted for the remaining 39.1% of sales. 67.5% of its profits, meanwhile, came from vegetation management activities, with the remaining 32.5% attributable to its industrial equipment. In addition to selling the goods as a whole to its customers, the company also has a rather large operation dedicated to supplying aftermarket parts. In fact, in 2021, 19.7% of its revenue was dedicated to the sale of parts. Geographically speaking, the firm is also very diverse. Naturally, the US still accounted for the largest portion of sales, coming in at 71.4% in all. But the company also has a rather large presence in other nations. 6.9% of sales, for instance, were attributable to France, while 6.3% were chalked up to Canada. Other countries that it has significant exposure to include the UK, Brazil, the Netherlands, Germany, and Australia.

From a sales perspective, the overall trajectory seen by the company has been positive in recent years. Revenue went from $912.4 million in 2017 to $1.33 billion in 2021. In fact, in no single year during this five-year window did we see sales actually drop year over year. In 2021, the company experienced a rather sizable sales increase totaling 14.7%. Management attributed this to the continued strong recovery in customer demand across both of its operating divisions. This was especially prevalent in the vegetation management side of things, with sales shooting up 24.1%, largely as a result of high demand in the forestry and tree care space, as well as in the agricultural mowing units category. Net industrial equipment sales, meanwhile, grew a more modest 2.5%. This was mostly due to higher customer demand for excavation and vacuum truck products. However, it was offset to some degree by soft demand for snow removal equipment.

From a profitability perspective, the picture has not been quite as clear. After seeing net income spike from $44.3 million in 2017 to $73.5 million in 2018, it began a consistent decline year over year, eventually bottoming out at $57.8 million in 2020. But then, in 2021, the surge in demand pushed profits up to $80.2 million. Operating cash flow has been similarly volatile, ranging from a low point of $12.9 million to a high point of $184.3 million. However, if we adjust for changes in working capital, the overall trend here has been positive. In this case, the metric rose from $68 million in 2017 to $126.9 million in 2021. The same kind of trend can be seen when looking at EBITDA. Based on the data provided, this metric rose from $109.4 million to $163.2 million over the past five years.

During the first nine months of 2022 , the volatility for the company persisted, but to a much more limited degree. Sales, for instance, did rise year over year, climbing from $997.1 million to $1.13 billion. Net income also improved, climbing from $61 million to $72.8 million. On the other hand, operating cash flow plunged from $43.4 million to negative $21.2 million. The good news on this front, however, is that if we adjust for changes in working capital, the metric would have risen from $89.5 million to $107.5 million. And finally, EBITDA for the enterprise rose from $122.9 million to $139.8 million.

Management has not provided any guidance for the 2022 fiscal year in its entirety. But if we annualize results experienced so far for the year, we would anticipate net income of $95.7 million, adjusted operating cash flow of $152.4 million, and EBITDA of $185.6 million. Based on these figures, the company is trading at a price-to-earnings multiple of 20.1. The price to adjusted operating cash flow multiple should be 12.6, while the EV to EBITDA multiple would be 11.9. By comparison, if we were to use the data from 2021, these multiples would be a bit higher at 23.9, 15.1, and 13.5, respectively. As part of my analysis, I compared the company to five similar businesses. On a price-to-earnings basis, these companies ranged from a low of 13.9 to a high of 76.1. In this case, two of the five firms were cheaper than our target. Using the price to operating cash flow approach, meanwhile, we would end up with a range of between 10.5 and 132.6. And when using the EV to EBITDA approach, that range would be from 9.8 to 44.5. In both of these scenarios, one of the five firms was cheaper than our target.

Takeaway

From a purely operational perspective, Alamo Group seems to me to be a solid business. Yes, the company has faced some volatility on its bottom line. But for the most part, its overall growth trajectory has been positive and shares are trading at relatively attractive levels. I wouldn't call this a home-run candidate by any means. But I do think it offers enough upside potential to warrant a ‘buy’ rating at this time.

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