CMI - Atmus Filtration Technologies: Filtering This Offering

2023-05-26 16:55:50 ET

Summary

• Atmus Filtration Technologies Inc. is the filtration operation from Cummins that was spun out from that business.
• While valuations are non-demanding, I fear a potential addition to corporate cost overhang and long-term promise of the business.
• For me, Atmus Filtration Technologies Inc. stock remains a show-me story post the offering.

Shares of Atmus Filtration Technologies Inc. ( ATMU ) have seen a successful public debut . This does not surprise me, as their filtration business is solidly profitable and trades at a non-demanding earnings multiple post the spinoff.

While this looks compelling, I fear the overhang of corporate cost allocation and, in the long run, the impact of electrification on the Atmus Filtration Technologies Inc. business.

Filtration

Atmus Filtration Technologies Inc. was formed in 2022, being the filtration business of Cummins Inc. ( CMI ) . The company provides filtration products for on-highway commercial vehicles and off-highway agriculture, construction, mining and power generation vehicles. Most of these products are produced under the Fleetguard brand, designed to lower emissions and provide superior asset protection.

The business has a history of more than 60 years and generates over $1.5 billion in annual sales. Most of the sales are related to fuel (nearly half) with lube, air, ventilation, chemicals and hydraulic being smaller segments. Half of sales are generated in North America, with the other sales derived from EMEA, Asia-Pacific and Latin America.

The company believes that the total filtration market measures some seventy billion dollars, although the Atmus total addressable market, or TAM, is pegged at $13 billion, suggesting that the business holds about a ten percent market share of this addressable market.

The company believes that its target market enjoys a solid outlook driven by growth in the general economy, growth in emerging markets, but moreover stringent emission standards and technological transition.

Key clients include CNH, Cummins, Deere, Daimler, Doosan, Komatsu and a few others. These customers make up about two thirds of sales, creating some dependency risks, to be expected given the industry competition.

Valuation & IPO Thoughts

Cummins was the 100% owner of Atmus pre the IPO. Some 14.1 million shares were offered at the offer price of $19.50 per share, in a $275 million IPO. Post the offering, Cummins will hold 83% of the stock, as the total shares count of 83 million shares value equity of the firm at $1.62 billion.

That is just part of the story, as the pro forma balance sheet reveals a $540 million pro forma net debt load, for a $2.16 billion enterprise valuation.

The company has seen steady growth in recent years. Revenues grew from $1.23 billion in 2020 to $1.44 billion in 2021, and grew further to $1.56 billion in 2022. Pro forma operating earnings have been rather stagnant at $199 million, $215 million and $194 million, respectively, for each of these years.

With EBITDA reported at $234 million last year, leverage is reasonably under control at 2.3 times. Pro forma, the debt assumed post the Cummins spin-off, pro forma net earnings were reported at $128 million. This works down to earnings of $1.50 per share, plus or minus a couple of pennies. This suggests that shares trade at just 13 times earnings.

First quarter sales rose by nearly 10% to $418 million, as pro forma operating earnings rose from $44 million to nearly $58 million, albeit that assumed debt and related interest expenses made that net earnings were flat at $35 million. Trending at a rate of $140 million per annum, pushing up earnings power to $1.70 per share, as the price-earnings multiple only came in at 11 times.

Atmus Filtration Technologies Inc. shares have risen to $22 on the first day of trading, adding about $200 million to the valuation, and while it increases earnings multiples to about 12–13 times, these remain non-demanding valuation multiples.

Concluding Remarks

The truth of the matter is that the Atmus Filtration Technologies Inc. valuation looks quite compelling here at 12-13 times earnings. There are some risks, however, related to the cyclicality of the business, and, of course, the controlled status of the business by its former parent.

Moreover, customer concentration is evident as Cummins, PACCAR, and the Traton Group combined generate about half of sales. Furthermore, there are the range of normal operational risks, in this case specifically a transition to electrical vehicles, as well as the fact that some debt has been assumed (from Cummins) of course.

Perhaps the biggest risk in my opinion is that the Atmus Filtration Technologies Inc. business is being spun out of an existing business. Having covered many spinoffs in the past, I am often negatively surprised by the degree of cost overhang which is now showing up in the numbers now, but it is often apparent after such a move.

It is this observation which means that, despite the compelling current earnings multiple, Atmus Filtration Technologies Inc. remains a show-me story first, as I anxiously look forward to the margin developments post the IPO.

For further details see: