Allient: Many M&A Moves In Motion (Rating Downgrade) (NASDAQ:ALNT)

At the start of 2022, I believed that M&A was the driver behind further growth in the case of Allient Inc. (NASDAQ:ALNT), at the time still known as Allied Motion Technologies, as the company changed its name this summer.

The company has become quite active in M&A in recent years, pushing up leverage a bit, and the performance has been a bit uneven with sales showing decent growth, but earnings not so much. This makes me quite cautious, although that above-average volatility does seem to create interesting trading opportunities at times.

About Allient

Allient Inc. describes itself as a connected motion company, claiming superior expertise in electromagnetic, mechanical, and electronic motion technology, and integrated solutions stand at the basis of its competitive positioning.

The company has a long heritage, founded in 1939 under the name Hathaway Corp, as it went public thirty years later. The expertise in technology is applied to niche segments in order to create innovative products, while the business is organized in quite a lean structure.

The company has seen solid growth over the past decade as it has on a very occasional basis employed M&A efforts to further grow the business. Typical target markets include industrial markets, vehicles, medical, as well as aerospace & defense. Applications in these industries include material handling, robots, power steering, HVAC systems, alternative fuel systems, hand piece motors, airport screening, guided missile system, among many other applications.

At the start of 2022, the 14.4 million shares outstanding traded at $36 per share, granting the company a $518 million equity valuation, a valuation which excludes a $90 million net debt load. At the time, the company was posting sales at around $400 million per annum, with annualized operating earnings trending at $32 million. Leverage ratios came in around 2 times, with EBITDA coming in around $50 million per annum.

The company had just undergone an M&A spree, which included a $9 million deal for ORMEC Systems in November 2021, the purchase of ALIO industries in a $20 million deal, and a $70 million deal for Spectrum Controls on the final day of 2021.

These deals combined came at a cost of around $100 million, which undoubtedly would boost earnings power, creating a credible roadmap for earnings to come in around $2 per share, or even more. With shares trading at $36, the valuation looked largely fair, with no great need to get involved as M&A efforts jacked up leverage ratios a bit as well.

Struggling

Over the near two-year period since I last covered shares of Allient, shares actually fell to the low-twenties in the summer of 2022, after which shares recovered to $45 in spring of this year, now having sold off to the $30 mark again.

In March of this year, Allient posted relative strong 2022 results with revenues up 25% to $503 million. Operating profits were reported at $26 million in 2021, but rose to nearly $32 million in 2022, for paltry GAAP margins of 6% and change.

This improvement in earnings, albeit from a low level, was seen despite amortization charges nearly doubling to $11 million and change in the wake of the aggressive dealmaking strategy. GAAP profits fell from $24 million and change to $17 million on the back of higher interest expenses, with GAAP earnings down from $1.66 to $1.09 per share. Adjusted earnings, mostly adjusted for amortization charges, came in at $1.88 per share, actually falling short of my run rate estimated early in 2022.

Dealmaking made that net debt was reported at $205 million while full year adjusted EBITDA was reported at $65 million, resulting in a low 3 times leverage ratio. Investors had to swallow some dilution as well, in part as the company engaged in more deals in 2022.

In May, Allient announced a 20% increase in the quarterly dividend, although that a $0.03 per share quarterly dividend is not that meaningful of course, for a dividend yield of just 0.4% here. The company furthermore reported decent first quarter results with revenues up 27% to $145 million, with adjusted earnings up 55% to $0.55 per share. Adjusted EBITDA is trending around $75 million on an annualised basis, comforting as net debt was rather flattish at $211 million.

In August, Allient posted a 20% increase in second quarter sales to $147 million, with adjusted earnings reported at $0.58 per share. Quarterly adjusted EBITDA topped the $20 million mark, as net debt fell to $203 million, reducing leverage to about 2.5 times here. This report came just ahead of its official name change, which took place in August. These events were only to be followed by a next bolt-on deal in September, when Allient acquired Sierramotion, although no financial details on the purchase were announced.

Concluding Thoughts

With Allient Inc. earnings now reported at $1.13 per share in the first half of the year, a >$2 earnings per share run rate is certainly achievable here. These earnings are largely in line with my estimates early in 2022, but this was based on a $400 million business, which by now has become a near $600 million business. Other than the softer earnings and higher debt load, due to acquisitions made ever since, there is also the issue of a declining backlog. In fact, the backlog of $299 million is actually down significantly from $324 million this period last year.

While the operating performance was not too impressive, it feels as if shares tend to overreact to the actual news flow. A low $20 share price this summer last year, more than doubled to the mid-forties this spring, now down to $30 again. Based on the current Allient Inc. earnings power, multiples have contracted to about 14 times, but the issue is that higher interest rates and lower orders might cause a bit of pressure on these earnings numbers and this might create an upward lift to the earnings multiples.

Given this, I have some question marks about Allient Inc. The current multiple has come down a great deal, but despite top line sales growth (induced by M&A), I lack conviction. That said, given the heightened volatility of the stock in the past, I would be considering an entry point for Allient in the mid-twenties, assuming that some weakening trends will be seen in the second half of the year.