ATROB - Astronics Corporation: Still Not A High-Flier

2023-08-16 18:38:35 ET

Summary

• Astronics Corporation has seen a significant increase in sales but has struggled to improve its bottom line.
• The company experienced stagnation before the pandemic, with a decline in sales and operating profits.
• Despite recent growth, Astronics stock is still valued at around 1 times sales, which is compelling if margins can improve, which is a big if.

Almost a year ago, I believed that shares of Astronics Corporation ( ATRO ) were flying low with shares trading near their lows as execution was not being delivered upon. While a modest recovery in sales was seen coming out of the pandemic, the company continued to post losses. Given my skepticism on execution, I believed that shares were a speculative buy at best, as I failed to have conviction to hold a position in size.

Ever since, the company has seen great traction, but that focuses on the top line rather than the bottom line, which makes me cautious after shares have doubled over the past year.

A Roll-Up Story Stagnating

Astronics has been a nice roll-up story in the 2010s, having grown the business from about $150 million in sales in 2007 to $700 million in 2015, although that part of the growth was financed by dilution, with the share count increasing by some two-thirds over this period of time.

Nonetheless, a single-digit stock in 2007 rose to highs around the $50 mark in 2015, but ever since it has been quite some stagnation which has been seen by investors. The peak around the $50 mark was supported by resilient earnings power of $2-$3 per share those years, but started falling ahead of the pandemic, as shares traded around the $30 mark pre-pandemic. This came after the company posted a small decline in sales to $773 million in 2019, but moreover, it posted an operating profit of just a million absent of one-time items.

With 31 million shares supporting a $930 million equity valuation at $30, and the business valued at an enterprise value of $1.1 billion, the 1.5 times sales multiple was low for the industry in which the company operated, but margins were the issue.

The pandemic meant that sales fell to $502 million, and operating losses were reported around $100 million. With fourth quarter sales trending at far lower levels, the $500 million sales outlook for 2021 strangely enough looked quite upbeat. As it turned out, 2021 sales fell another 11% to $445 million, with operating losses of $29 million improving greatly from 2020, but still representing a loss of course. Nonetheless, there was a sense of calmness, with net debt coming in stable at $133 million.

The company originally guided for $550-$600 million in sales for 2022, although that the company trimmed the higher end of the outlook to $580 million alongside the second quarter earnings report. Trading at just $8 in September, the 32 million shares granted the business market capitalization of just a quarter of a billion in September last year, with the enterprise valuation coming in at $380 million.

Trading well below 1 times sales, the business looked cheap, but the business was not out of the woods, as realization of a stronger second half of 2022 might really drive earnings potential and the share price as well. It was the reliance on execution which limited by my enthusiasm to just a speculative position given the many uncertainties on the execution front.

Coming To Life

With the benefit of hindsight, I wished that I held a bit more conviction in my thesis, as nearly a year forward in time ATRO shares trade at $16, having doubled from levels at $8 in September, after even trading as high as $22 per share in recent weeks.

Early in March, Astronics posted its 2022 results. Revenues rose by 20% to $535 million for the year, although still accompanied by a $30 million operating loss which was largely unchanged on the year before. Nonetheless, there were encouraging signs as fourth quarter sales rose by 36% to $158 million, a quarter in which operating losses narrowed to just $3 million.

Another promising development was that the business reported bookings of $690 million for the year, adding to a backlog of $571 million in future business. With shares recovering to the mid-teens, that was about the time when I sold my small position.

On the negative side was that net debt ticked up to $150 million, but the company clearly saw momentum into 2023, with sales seen between $640 and $680 million.

In May, the company posted first quarter sales with revenues up 35% to $156 million, on which operating losses of $2 million and change were reported, as poor working capital conversion resulted in net debt ticking up to $172 million, while the company maintained the full-year guidance.

Amidst increasing optimism, shares fell from $21 to $17 overnight early in August, upon the release of the second quarter results . This came even as sales rose some 35% to $174 million, on which the company posted an operating profit of $2.4 million, the first gain in a long period of time. This still resulted in a GAAP loss of $12 million, although heavily influenced by higher tax rates. Amidst higher inventory levels, net debt ticked up to $178 million, as this is likely why the market reacted with a sell-off to the numbers.

As the company maintained the full-year sales outlook at $640-$680 million, that implicitly calls for sales between $309 and $349 million in the second half of the year, after revenues totaled $331 million in the first half of the year already, on which breakeven operating profits were reported. The lack of earnings and lack of a hike in the guidance are probably the reasons why investors are cautious after shares have seen a decent run higher so far this year.

With 32 million shares now trading at $16, the market capitalization of $512 million, or enterprise valuation near $700 million, means that the business is still just valued around 1 times sales. Even as real growth has returned, the company is breaking even at best, and that is even on an operating profit basis, with GAAP losses appearing. For that reason, the company likely initiated a $30 million at-the-market equity program to tackle the built-up in debt a bit and preserve liquidity.

What Now?

The reality is that after shares have doubled over the last year, the market has recognized the progress which the company has made, and this is clear in terms of order and revenue growth. The disappointing factor is that Astronics Corporation only is able to break even on an operating basis on these activity levels, as I believed that profitability should be in sight by now.

Given this observation and the big move in the underlying share price, I am a lot more cautious here bout Astronics Corporation stock. I am seeing no reason to get involved with this anything-but-a-high-flier stock here.

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