American Electric Technologies is strategically positioned to benefit from increased spending on energy infrastructure and equipment.
The company's growing international presence allows for diversification and exposure to rapidly growing markets like China and Brazil.
AETI is poised to benefit from industry trends while currently trading at a discount compared to peers.
American Electric Technologies, Inc. (AETI) is a provider of power delivery solutions to the energy industry. The company operates under three segments: Technical Products and Services (TP&S), Electrical and Instrumentation Construction (E&I), and American Access Technologies (AAT). The majority of products and services produced by AETI are in the oil and gas industry, but the company also has a presence in renewable energy and industrials.
|Market Cap||$52.84 M|
|2013 Gross Profit||$53.52 M|
|2013 Net Income||$4.21 M|
|2013 Cash||$4.15 M|
|2013 Debt||$0.5 M|
Source: Created by author.
AETI's international business is conducted through both direct selling with foreign agents and joint ventures with local partners, with the latter being emphasized. The company currently has three joint ventures in China, Singapore, and Brazil which account for roughly 16% of 2013 revenue. In China, AETI owns 40% of a JV with Baoji Oilfield Machinery, a subsidiary of China National Petroleum. So far, AETI has invested $2M to manufacture power and control systems for land drilling rigs in China. AETI also owns 41% of a JV with Sonepar, a private French company, in Singapore, which provides sales, engineering, manufacturing, and technical support for a variety of products across Southeast Asia.
In Brazil, AETI owned 49% of a JV with Beppe Hans Eddy Askerbo, providing electrical products and services to Brazilian energy industries. The company recently withdrew from this venture on April 15 of this year, but management indicates that it is looking to form a wholly owned Brazilian subsidiary. This is a positive development, as Brazil is a very important market for AETI because of its rapid energy growth. Brazil, along with China, is expected to see a more than 70% increase in energy demand within the next twenty years. A strong international presence is a catalyst for growth going forward and provides diversified market exposure.
The management of AETI has done well identifying trends in its product lines and adjusting the business accordingly. TP&S has been the company's most successful business division accounting for 75% of net sales in 2013. TP&S has experienced increased order volume and growing margins, primarily because of the oil and gas industry. This development is positive, because oil and gas is poised to continue seeing an increase in capital spending. Upstream exploration and production spending in North America has increased 46% from $243B in 2009 to $355B in 2013. Now, midstream and downstream capital spending is increasing to keep pace, with midstream surging 263% from $12.8B in 2012 to $46.4B in 2013 and downstream increasing 60% from $15.5B in 2010 to $24.7B in 2013. AETI stands to gain from these developments, as it has already begun to profit from the increasing demand.
To focus on these positive trends, AETI has downplayed some of its other sectors. Within E&I, AETI completed a strategic exit from its waste-water business in 2012, which has boosted margins. Now management is initiating a strategic review of the AAT sector, which has been struggling recently. A sale or spin-off of AAT could unlock value to the company and shareholders.
Industry Outlook and Comparison
AETI mainly operates in the electrical equipment industry, which is poised to expand going forward. As demand for energy-efficient electrical equipment continues to grow, companies like AETI will benefit. Additionally, in 2008 the Federal Energy Regulatory Commission said that there would be a tremendous investment needed to upgrade the country's aging energy infrastructure. With its exposure to the large oil and gas industry, as well as renewable energy sources like solar, biomass, and geothermal, AETI is strategically positioned to grow.
The fundamentals of the company also present a solid investment opportunity. AETI has a P/E of 14.42, compared to an industry average of 37.92. Its forward P/E of 14.75 is also better than the industry average of 26.39. Many of AETI's main competitors are mostly domestic, but AETI has enough international exposure to hedge some of its risk and experience growth from many different sources.
Although AETI is well-positioned in its industry and markets, it is still a very small company that could allow bigger competitors to come in and take market share. Additionally, the oil and gas industry accounts for 62% of AETI's 2013 revenue, so any slowdown in that industry would adversely affect AETI. There is a also a chance that the rapid growth in the upstream and midstream sectors may be reaching a peak, meaning AETI will not experience a substantial benefit going forward. Despite these risks, AETI is still a solid company that presents an excellent investment opportunity.
Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in AETI over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
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