Allied Motion Technologies: M&A To Drive Further Growth

Summary

Allied Motion has seen some operating momentum this past year, with further orders and M&A to drive growth in 2022.

I like this set-up as the pro forma earnings power looks quite interesting, as there could be an upside surprise here.

While Allied Motion is a bit small, and less familiar in my book, I am still willing to initiate a small position here.

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alvarez/E+ via Getty Images Allied Motion Technologies (NASDAQ: AMOT ) is a smaller cap name which has seen some interesting developments in recent years. The company has seen a huge rise and advancement in recent years, as this and a few recent acquisitions more than warrant an update.

I see quite an appealing and diversified industrial conglomerate, which has seen solid operational traction as of recent, as it has furthermore announced three deals recently, creating a nice set-up for a solid 2022. Motion Company

Allied Motion is a connected motion company, claiming to have superior expertise in electromagnetic, mechanical and electronic motion technology. The company claims to have a competitive advantage through its integrated solutions.

Operating under four segments, the company reports revenues at a run rate of roughly $400 million per annum, split across five divisions. The largest segment is the vehicle market for which Allied Motion provides electronic power steering, actuation systems, mobile HVAC systems, and alternative fuels systems.

The industrial market is almost equally large, responsible for a third of sales as well, as this includes material handling equipment, robots, power quality, wire feeders. Smaller end markets include the medical market (equal to t fifth of sales) and a smaller aerospace & defense, and distribution segment. Current Performance

Allied Motion posted third quarter results early in November with quarterly revenues up 9% to $103 million on which the company posted operating profits of $8 million, resulting in net earnings of $6 million, or $0.41 per share.

The 14.4 million shares now trade at $36, which translates into a $518 million equity valuation, or $608 million enterprise valuation if we include net debt of $90 million. Based on a run rate in terms of $400 million in sales, the company trades at 1.5 times sales, yet with annualized operating earnings power trending at $32 million and net earnings at $25 million, valuations look full at 20 times earnings, while leverage comes in around 2 times based on EBITDA trending at $50 million a year here. A Deal-making Spree

Since the announcement of the third quarter results, Allied Motion has been very active on the deal-making front, with three deals announced ever since. Early in November, Allied announced the purchase of ORMEC Systems in order to boost its presence in the aerospace and defense business. Only the purchase price of $9 million which has been reported, with no revenue or profit contribution indicated.

The company furthermore announced the purchase of ALIO Industries in a $20 million deal, although that includes a $ 5million cash component, with again, no revenue contribution or other financial details being announced.

On the final day of the year, Allied announced the acquisition of Spectrum Controls in a deal valued at $70 million. The deal involves a $45 million current purchase price, of which $27 million in cash and $18 million in stock. The remaining $25 million is paid in two installments in the coming two years, split 50/50 between cash and stock. Again, no revenue contribution has been announced, yet the three acquisitions combined come at a near $100 million price tag, equal to about a sixth of the current enterprise value. What Now?

Ahead of the deal-making spree, I find it a bit hard to become very upbeat with earnings power annualized trending at $1.60 per share here, while leverage comes in around 2 times EBITDA. However, the results reveal that the rapid increase in the backlog is promising, as this stood at $185 million by the end of the third quarter, up 50% on the year before. Moreover, quarterly bookings of $120 million results in book-to-bill ratio of around 1.2 times, as the rather quick conversion of this backlog makes 20% growth for 2022 quite realistic. This creates a credible roadmap for earnings around $2 dollar.

This roadmap, driven by organic growth in the coming quarters, as well as the impact of the three recent deals, could perhaps lead to an upside surprise next year, as earnings power could easily trend around $2.50 […]

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