AIN - Albany International: Going More International

2023-06-20 13:09:46 ET

Summary

• Albany International Corp. is a niche machinery manufacturer, posting solid margins as it operates a strong business in niche segments.
• The company is probably rightfully awarded a premium valuation as it is using its balance sheet strength to make an interesting deal in Germany.
• I like the deal and the business, but find valuations a bit too demanding for me here.

When Albany International Corp. (AIN) announced a substantial deal to acquire Heimbach Group recently, I was shocked to see that I have never covered this stock and company before. Given the interesting deal and the end-markets in which the company operates, the establishment of an investment thesis of this apparently interesting business here is long overdue.

An Intro

Founded late in the 19th century, in fact 1895, Albany has steadily grown to become a technology business with global operations which generate about a billion in sales, generated by some 4,000 workers.

The company operates in two large segments. Machine clothing provides engineered product solutions for the pulp & paper and other process industries. These technologies and products focus on consumable products, as the machinery is typically proprietary, tailor-made, mission critical, and required to operate in a harsh environment.

The engineered composites segment provides engineered product solutions in defense and aerospace applications. These products too are proprietary, mission-critical and highly engineered.

The Numbers

In February, Albany posted its 2022 results for a year in which revenues rose some 11% to nearly $1.04 billion. About 60% of sales are generated from the more profitable machine clothing segment, and the remainder from engineered composites.

The company has clearly seen inflationary impacts, with gross profits just up modestly in absolute dollar terms, though that tight operating expense control meant that operating profits of $181 million were still up three million dollars on the year. Due to a $49 million pension settlements expense, earnings fell to $95 million and change, or $3.04 per share based on a share tally of around 31 million shares. Adjusted earnings came in at $3.89 per share, with most of the discrepancy being the result of this pension charge. Net debt of $147 million was very modest, certainly, as adjusted EBITDA came in at just over a quarter of a billion.

The 2023 guidance was not particularly impressive with sales seen largely flattish at a midpoint of $1.03 billion. Adjusted EBITDA is seen between $225 and $255 million, with adjusted earnings per share seen down a bit to $3.60 per share.

To shed some perspective: the stock of Albany traded around the $80 mark pre-pandemic already and traded around those levels in its aftermath, although shares peaked in the low $100s at the start of this year, now exchanging hands at $90 per share. Needless to say, based on the adjusted earnings numbers posted in 2022 and the outlook for 2023, shares look fully valued, even if the business is a bit under-leveraged.

Some Upbeat Developments

Late in April, Albany posted first quarter results which looked strong. After guiding for flattish sales in 2023, first quarter sales rose by as much as 10% to $269 million, as operating earnings rose a bit less to more than $40 million, with earnings coming in largely flat at $0.86 per share on the back of lower other income. Net debt ticked up to $187 million, mostly due to poor working capital conversion. Despite the stronger quarter, the company maintained the full year guidance on most fronts, potentially leaving upside potential to the guidance.

The 31 million shares now command a $2.8 billion equity valuation and about $3.0 billion enterprise valuation. The company flexed its muscles, in the sense of the strong balance sheet, in June when it announced an EUR 153 million deal to acquire German-based Heimbach Group. The deal is equivalent to about 5% of the current valuation, but it will make a meaningful positive impact to the business.

Heimbach is a supplier of paper machine clothing used in the production of all grades of paper and cardboard on all machine types. The business is rather large, employing some 1,200 workers which generate EUR 161 million in revenues. This values the operations at less than 1 times sales, while Albany trades at nearly 3 times sales. Little detail on margins have been communicated in the press release, although they likely will come in lower, but the deal is set to be accretive to earnings per share in year two.

The deal presentation revealed EBITDA margins around 9% reported by Heimbach, although efficiencies and cost savings should reduce the purchase price (in terms of an EBITDA multiple) to 3.5-4.0 times over time, potentially unlocking great value if it can be delivered upon.

Shares hardly reacted to the deal, but quite frankly the price looks decent, although it all depends on the execution of the plans to bolster margins and integrate these activities. That said, a 15-20% revenue contribution might push earnings to $4.00 per share in 2024, or even beyond. That however requires execution, but the reality is that even as leverage comes in just over 1 times (in fact 1.2 times EBITDA) as the overall valuation multiples remain quite demanding from an earnings perspective

Caution Saves the Day

The truth is that Albany International Corp. looks like a decent play, as the company has made some other, savvier deals in other recent years as well. Given this I am quite upbeat on the business, as it has a strong niche positioning, higher margins, lower leverage, and ability to make a bolt-on deal like the one just announced.

All this looks quite impressive, but the reality is that a current multiple in the low twenties for Albany International Corp. stock is simply a bit too high for me to be appealed here, although I am curious to learn more about the recent deal in the coming quarters.

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