ALG - Alamo Group: Growing More Appreciative

2023-12-13 03:21:16 ET

Summary

• Alamo Group has seen record revenues and expanded its margins, as the business is performing very well.
• The company specializes in agriculture and infrastructure equipment, with a strong track record, driven by a diverse product range in niche segments.
• Despite some headwinds, including a decrease in the backlog, Alamo Group's performance and balance sheet strength make it a promising investment option.

In the spring of 2022 I concluded that Alamo Group ( ALG ) was plowing along, as it saw record revenues, but some margin pressure held profits back to a degree. The dip observed at the time has proven to be temporary, with sales and margins having expanded ever since. I have grown a lot more appreciative of the business here, actively looking for a dip in order to get involved.

Agriculture Equipment Power Play

Alamo Group is a global player in equipment which focuses on agriculture and infrastructure markets. Been around in business for over 50 years, the company has a sound (dividend) track record.

Typical products to think of include outdoor equipment like cleaners, sweepers, snow plows, lawn mowers, pickers, rakes, rotary cutters, etc. Industrial and equipment products are the largest segment, complemented by the agriculture segment and its European segments.

During the 2010s, the company roughly doubled its sales to just over a billion dollars, the result of a combination of organic growth and bolt-on, or tuck-in acquisitions, being pursued.

Pre-pandemic, a near $120 stock commanded a $1.4 billion equity valuation, ahead of a modest net debt load. Valuations looked largely fair with earnings power seen around $7 per share, although growth and leverage would increase a bit after a >$300 million deal for Morbark which was announced in 2019.

Running High

After they ran to a high in the $160s in 2021 post the pandemic, shares were down to $120 per share in the spring of 2022, as the business was held back to the pandemic and supply chain issues to some extent.

2021 results showed revenues rose 15% to $1.33 billion, aided by a post-pandemic recovery and the purchase of Morbark, with earnings posted around $7 per share, in line with the pro forma earnings power seen following the purchase of Morbark.

Net debt was down to $227 million, all while EBITDA advanced to $162 million, pushing down leverage ratios rapidly to less than 1.5 times, even as the company announced a bolt-on deal for Timberwolf in the meantime.

First quarter results for 2022 rose 16% to $362 million, yet operating margins fell 20 basis points to 8.0% of sales. Adjusted earnings rose sixteen cents to $1.63 per share, although net debt ticked up due to seasonality. With earnings power trending at $7 per share, the company traded at a fair 17 times earnings multiple, while leverage had come down a long way.

This left me to conclude to buy some shares on further dips, which have only materialized in a minor extent.

A Big Recovery

Since the spring of 2022, when shares even hit a low around the $110s, shares have seen a huge recovery and rallied to the $200 mark over the summer. Mostly having traded in a $150-$200 range over the past year, shares now trade at $188 per share.

This was backed up by strong results, with 2022 revenues up 13% to $1.52 billion. Net earnings of $102 million were equal to $8.54 per share, but this is after a pre-tax $15 million amortization charge, which if added back means that earnings would come in around a dollar per share higher.

Momentum continued in 2023 with first quarter sales up nearly 14% and second quarter revenues advancing by 11%. In November, third quarter revenues were reported up nearly 14% to $420 million. This was driven by a 23% increase in industrial equipment sales to $173 million, although vegetation equipment revenues rose by a solid 8% to $247 million.

Quarterly operating earnings rose 39% to $50 million, with operating margins posted near 12% of sales, historically very sound numbers. Net debt was down to $209 million, lagging trailing EBITDA of $245 million in a considerable way, for leverage ratios below 1 times.

So far this year, earnings have come in at $8.73 per share, making an earnings number around $11.50 per share look reasonable. This translated into a 16-17 times earnings multiple, which looks reasonable but comes amidst historically strong margins as there are some headwinds. This includes the fact that the backlog was down 2% to $891 million, indicating that growth might slow down (rather dramatically) in the medium term.

And Now?

The nearly 12 million shares of Alamo now grant the business a $2.25 billion equity valuation, or a near $2.5 billion enterprise valuation. This values the business at around 1.5 times sales, seen at $1.6-$1.7 billion this year, while low double-digit margins are reported here.

Using its balance sheet strength, Alamo announced the acquisition of Royal Truck & Equipment in October. The acquired company is a manufacturer of truck mounted highway attenuator trucks used in highway infrastructure and traffic control.

The business generated $44 million in revenues on a trailing basis, adding some 2-3% to pro forma sales, while no margin details have been announced. No purchase price has been announced, but likely the deal comes in the tens of millions, meaning that modest sales and earnings accretion is seen, while leverage continues to come in around 1 times EBITDA.

Doing Well

Quite frankly I am impressed by the performance of Alamo as more credit is due than given so far, or in the past. While this is very true, I am furthermore aware that margins have historically come in at higher levels, as the question is what sustainable through-the-cycle margins really are.

Amidst all of this, I am upping my regard of the business, but hoping for a pullback in the share price before getting involved here, making any pullback towards the $150 mark look quite interesting.

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