Harman International - Solid Strategic Acquisition Of AMX LLC, Yet Appeal Is Limited

May.27.14 | About: Harman International (HAR)

Summary

Harman International acquires AMX LLC in a $365 million deal.

With the acquisition, Harman bolsters its smart connectivity solutions.

Despite great operational momentum and a strong future outlook, momentum is limited after shares doubled over the past year.

Harman International Industries (NYSE:HAR) announced the acquisition of AMX LLC last week in a deal which is expected to bolster its position as a leader in smart connectivity solutions.

Despite the rapid current growth, smart acquisitions and a targeted future margin increase I remain cautious for now. The current valuation has priced in a lot of good news already as shares have doubled over the past twelve months.

Acquisition Of AMX

Last week, Harman International announced that it has entered into an agreement to acquire AMX LLC for a consideration of $365 million from The Duchossois Group. Unfortunately no other financial details regarding revenues nor profitability of the business have been announced.

AMX provides enterprise control and automation systems as well as audio and video switching distribution solutions.

The deal allows Harman to boost its presence beyond cars into the enterprise business being a leader in smart connectivity solutions. With the deal, Harman can provide a more complete set of audio, video, lighting and automation solutions to its customers.

AMX has been founded back in 1982 and currently employs some 600 workers in 19 worldwide locations.

The deal fits nicely within the strategy of adding visual solutions to the legacy audio offerings of Harman. This strategy started with the acquisition of Martin back in 2013.

Third Quarter Headlines

At the start of the month, Harman released its third quarter results for the fiscal year of 2014. The company reported a 32% jump in third quarter revenues which came in at $1.40 billion. Net earnings more than doubled to $73 million in the meantime. The company reported growth across all of its major segments being the infotainment, lifestyle and professional business of the firm.

Based on the strong performance, Harman anticipates annual sales of $5.27 billion compared to a $4.7 billion target as set in August of last year. Earnings per share are anticipated at $4.36 per share, but note that this is a non-GAAP earnings metric with GAAP earnings seen roughly 10-15% lower.

The company issued a long-term outlook last summer which now appears to be very conservative. The outlook called for revenues of $6.05 billion in its fiscal year of 2016, combined with EBITDA margins of 13%. Note that EBITDA margins for the fiscal 2014 are seen around 10.5% of sales.

Valuing Harman International

On the back of the very strong operational performance and the latest deal, shares of Harman have risen to levels of $108 per share very close to all-time highs of $115 per share.

At current levels, the market values the company at $7.3 billion which includes a net cash position of around $290 million as released before. Given the $365 million price tag, Harman will operate with an expected flat net cash position at the moment.

With earnings anticipated to come in at roughly $250 million on a GAAP basis this year, shares trade at roughly 29 times annual earnings.

Valued For Margin Expansion

For Harman to trade at 29 times annual earnings, shares trade at a rather steep multiple. Shares have risen some 35% this year alone and have more than doubled over the past year.

Underlying these strong returns is the solid operational performance and the fact that the company has delivered very strong growth recently. The original 2016 outlook called for revenues of $6.05 billion, but expectations have risen considerably given the strong performance this year. Even if I foresee revenues of $6.5 billion in 2016, EBITDA is seen around $850 million if the company meets its EBITDA margin target of 13%.

Given the current net earnings/EBITDA ratio, this could translate into GAAP earnings of around $400 million which makes shares not very cheap at 18 times earnings two years ahead in time. Important to consider, the visibility of Harman's future growth is very high with $19 billion of orders in the backlog while the strong balance sheet allows for greater shareholder payouts. Harman's current quarterly dividend of $0.30 per share provides investors with an annual dividend yield of 1.1%.

While the company is making the right moves in targeting growth, margin expansion while making smart acquisitions, the valuation is too steep for me at the moment.

I remain on the sidelines, but would be buyer on serious dips in the $80-$90 range.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.