2023-12-08 11:36:18 ET
Summary
- AstroNova's restructuring of its Product Identification segment has led to improved operational efficiency and increased operating profit.
- Q3 FY24 shows a 62% Product Identification segment operating profit increase, demonstrating operational efficiencies.
- AstroNova's Test and Measurement segment has seen a revenue increase and operating profit margin boost due to the post-pandemic recovery in the airline sector.
Introduction
AstroNova, Inc. ( ALOT ), the data acquisitions and visualization solutions provider and printer manufacturer, operates in two segments: the Test and Measurement (T&M) segment and the Product Identification ((PI)) segment. The T&M segment offers flight deck printing devices and data acquisition and visualization systems for the aerospace and other sectors. The PI segment manufactures desktop and commercial printing devices.
In Q2 this year, AstroNova announced that the PI segment would undergo restructuring to improve operational efficiency. As for the T&M segment, the post-pandemic recovery in the airline sector has improved, favoring the T&M segment. This analysis will look at how the PI restructuring has gone so far, and also delve into the current growth trend in each segment, explore current and future opportunities in each segment, and a comprehensive analysis of the company's consolidated financials based on the recently released Q3 FY24 financial result.
Product Identification business Strategy Will Pay Off
Following AstroNova's acquisition of Astro Machine for $17.1 million last year, the company's management successfully restructured its PI production line, and the positive outcomes of this realignment are becoming evident. As part of the acquisition, AstroNova also gained control of Astro Machine's 34,000-square-foot engineering and manufacturing plant in Elk Grove Village, Illinois, which now serves as the cornerstone of AstroNova's PI production line. The production of certain PI product offerings has transitioned from Asia to Astro Machine's manufacturing facility in Illinois, streamlining the business processes within the PI segment.
In the Q3 FY24 financial results released this week, PI segment operating profit was up 62%, at a value of $4.8 million, and the operating margin improved by 820 basis points to 18.1%. This is proof that the restructuring of the segment has created operational efficiencies in my view. In the Q3 earnings call , AstroNova's management said the company has decided to phase out some printers with low sales volume. This strategic move will help AstroNova focus resources on more lucrative products and improve overall profitability.
The tech and products the company's PI segment offers can become obsolete over time, and investing resources in the development of new products is essential for the PI segment to maintain high-volume sales and profitability. AstroNova released three new printers and an additional commercial product in Q3 - the QuickLabel QL-900, the TrojanLabel T2-Pro, the TrojanLabel T3-Pro, and the VF-280 commercial vacuum feeder. Sales in Q3 in the PI segment were down 11% YoY, which the company attributed to the phasing out of some products and an issue with printer ink quality from one of AstroNova's suppliers, slowing down sales of certain printers. With the new line of products, the segment is expected to see improved sales in the coming quarters.
Test & Management Segment in Q3
The commercial aviation sector is bouncing back post-pandemic, and the momentum seems to be continuous. As air traffic is almost back to pre-pandemic levels and next year's air traffic predictions are looking good, AstroNova's T&M segment, which offers printing solutions and data visualization for airlines, is set to ride this wave. The latest earnings already reflect the positive trend, with the segment recording a solid 15.5% YoY revenue increase to $11 million. The segment's operating profit margin also saw a significant boost, climbing 520 basis points from 18% in Q3 FY23 to 23.2% in the last report.
AstroNova's total revenue from both segments experienced a slight decline of 4.7% YoY, amounting to $37.5 million. However, there's a positive trend in the company's financial health as the gross margin increased by 770 basis points YoY, reaching 39.4% of revenue. Additionally, the operating margin rose by 890 basis points YoY, reflecting effective cost management and operational efficiency. The income statement shows a noteworthy ~18% YoY reduction in Cost of Revenue, contributing to an improved gross margin. Various expenses related to selling and marketing, R&D, and SG&A all saw YoY improvements, showcasing AstroNova's commendable operational efficiency.
Valuation
11.12x EV/EBITDA is currently below the industry average EV/EBITDA of 15.02x and ALOT's 5-year historical average EV/EBITDA of 14.36x. I believe that the operational efficiencies (in terms of COGS and OpEx reduction) we are already witnessing will lead to better earnings and the stock price will become more undervalued and attractive relative to EV/EBITDA.
Conclusion
The global air passenger revenue passenger kilometers (RPKs) has exhibited significant improvement this year compared to last year. According to the recent Air Passenger market Analysis report by the International Air Transport Association (IATA), September's RPKs grew by 30.1% YoY, reaching 97.3% of September 2019 pre-pandemic RPKs. A similar upward trend was observed in August, with RPK increasing by 28.4% compared to August 2022, reaching 95.7% of 2019 pre-COVID levels. IATA anticipates robust travel demand next year, projecting revenue to surpass pre-pandemic levels for the first time, reaching $964 billion.
These positive projections for the commercial airline industry are poised to directly benefit AstroNova's T&M segment. While I maintain optimism for the PI segment, given the recent release of new printers expected to boost sales, the T&M segment remains a stronghold for the company. The guidance for the T&M sector is more quantifiable, as it is significantly influenced by trends in the aviation industry, which offers ample data for analysis.
AstroNova's ToughWriter flight deck printer is the standard printing equipment for Boeing's ( BA ) new widebody, twin-engine 777X aircraft, set to enter service in 2025. The Boeing 777X has garnered increasing orders from global airline companies. Emirates Airlines recently announced a $52 billion order for 95 Boeing 777X jets, bringing their total orders for this aircraft to 205 units. Other major airlines, including Qatar Airways with 74 units and Singapore Airlines with 31 units, have also placed orders for the 777X. This is an outright positive for AstroNova as it holds a 100% market share of the flight deck printer market. Each order equals a flight deck printer sale for AstroNova.
The prevailing trends in the aviation industry contribute to a positive outlook for ALOT. Though projections for the commercial aviation sector in 2024 are generally optimistic, it is important to acknowledge that the macroeconomic outlook for 2024 remains uncertain, and economic headwinds are expected to persist. These factors may impact the sector.
For further details see:
AstroNova: Takeoff Imminent Amidst Aviation Sector Recovery