Allied Motion Technologies Inc. (AMOT) is a manufacturer of motors and motion control products to commercial, industrial, aerospace and defense markets. It is headquartered in Amherst, New York with operations in North America, Europe as well as Asia. I think that Alliance is a company that is positioned to outperform the market but remains mostly unnoticed by investors. In the following article I will discuss how its strong financial position, growth drivers and reasonable valuation makes it a good investment opportunity.
Business: Founded in 1962 as Hathaway Corp in Colorado the company was in the power and process market until 2002. Since then it has rebranded and focused operations solely in the motion control business. It has also been making strategic acquisitions globally to solidify its position in the industry. As of December 2013 it had 942 employees including design, manufacturing and sales teams in the United States and overseas.
Some of the products and solutions it manufactures are used in alternative fuel vehicles, unmanned vehicles, weapons systems, prosthetics, chemotherapy pumps and testing of gaming equipment to name a few. So it has a fairly diversified customer base ranging from automotive to defense and medical industries. A positive extension of this fact is that the company has not relied on any one customer for over 10 percent of total revenue in the last 2 years.
The company holds several patents and trademarks, with many more pending, that are expected to create more value in the future.
Recent Financial Performance
In August the company reported strong second quarter 2014 results[i] largely on account of the acquisition of Globe Motors in late 2013. The new, larger entity led to a doubling of the company’s revenue, with a 145% growth over prior year in the second quarter. Most of this growth was concentrated in the defense, aerospace and automobile sector. Net income per diluted share grew 229% in the same period, from $0.09 to $0.29. Additionally bookings and backlog, which are good indicators of future income streams, also posted robust growth.
Business grew both domestically and abroad with a 191% increase in sales to U.S. customers and a 91% increase in sales to international customers. Currently the company’s revenue is split in approximately a 60 to 40 ratio between domestic and international customers respectively.
Overall the strong earnings results validated management claims of revenue and earnings improvements from the synergistic acquisition of Globe Motors.
Revenue and Returns
The following chart shows the 10-year trend in total revenue and gross margins for the company. The impact of the Globe Motors acquisition is reflected in the uptick in the 2013 revenue figure.
The company has achieved an overall positive trend in revenue as well as margins in this period with room for growth in the future. However growth in gross margins was flat between 2012 and 2013. Also in the first six months of 2014 gross margins remained at 29%. While Allied and Globe as separate companies had similar gross margins, the combined entity creates opportunity for margin expansion as synergies of engineering knowledge, technical know-how and operations are realized. Opportunities for cross sell are also likely to arise as the integration process proceeds.
Additionally the company has room to improve operating margins from current levels by improving operating efficiencies. There are likely to be positive impacts from Globe, which has a better track record than the legacy company with operating expenses and margins due to its structure.
On a different performance gauge, return on capital, the company does not impress at first. I used a simplified formula using Net Income and Total Current and Fixed Assets from the company’s financial statements to arrive at the following figures.
While 2012 was a lackluster year for the company’s financial performance due to economic weakness; acquisition and relocation expenses impacted 2013. Data from the most recent quarter yields a return on capital of 9.6% that exhibits a shift in that trend and indicates opportunities for better returns in the future.
In 2013 Allied acquired Globe Motors from Safran, Inc. for approximately $90 million. Globe not only nearly doubled the company’s revenue, but the impact on earnings was also accretive. Additionally it brings intangible assets such as a more concentrated base of larger customers, trade name and engineering knowledge. While the acquisition increased the debt and interest burden for Allied (a potential risk to the company) it was achieved without much dilution of shareholder’s equity.
In the past acquisitions such as Ostergrens and Premotec have expanded the company’s international footprint and grown its product portfolio. While the global presence exposes the company to the risk of economic slowdown in other parts of the world, it also opens up new markets and opportunities. Most of the company’s manufacturing facilities (both domestic and international) are currently operating below capacity. So it is well positioned to ramp up production as demand rises.
Diversified Customer Base
A safety cushion that the company has is the wide range of industries it serves with its products. The variety of sectors it serves ranges from automotive to appliances, semi-conductors and defense systems. For example, its technology is used in the medical field in pumps, prosthetics and other equipment. Typically demand for such products tends to be a little more resilient to business cycles, which is useful for Allied in times of weakened activity among its other customer groups.
Another example is the use of Allied’s products in unmanned vehicles. While these are primarily used in the defense sector right now, eventually the application of such technology could be more diversified. In that case Allied could benefit from growing demand of its products from new sources.
Price and Multiples
The company had a trailing 12-month P/E ratio[ii] of 17.38 that is in a similar range as many competitors in the industrial equipment production industry. This value is close to the lower end of the average monthly P/E ratios observed for the company since January 2014. It is also below the comparable S&P 500 multiple of 19.3[iii].
The trailing 12-month Price to Sales[iv] ratio for the company is 0.63 which is close to the 12 month low of 0.56. Additionally the trailing 12-month Enterprise Value to EBITDA multiple of 8.91 is comparable to others in the industry.
At the time of writing the company’s stock was trading at $13.52 which is lower than its 200-day moving average and presents a good entry point. In the past 52-weeks the stock price has risen approximately 69% compared to the S&P 500’s gain of about 15%. Despite the gain, I think there is still more upside remaining to the stock based on my analysis outlined above.