Altra Holdings: Nuts and Bolts of Growth

| About: Altra Industrial (AIMC)

Power transmission, gearboxes, industrial clutches and brakes might sound, well, a little too nuts and bolts to get excited about. But in beating Street estimates on first-quarter earnings and revenue, Altra Holdings, Inc. (Nasdaq:AIMC) has gotten pulses racing.

The designer and producer of motion-control equipment has nothing to do with the automotive industry. Rather, it provides key components for use in high-volume manufacturing where reliability and accuracy are essential in avoiding expensive down time. Some of the industries that Altra supplies (such as energy and mining) are in a real boom phase despite the general economic slowdown.

For the first-quarter ended March 29, earnings came in at $0.37 per share, compared with a consensus of $0.33. Jefferies & Co. analysts commented favorably on the performance, much better than the $0.30 they had predicted. Jefferies raised its earnings estimate for the year to $1.34 from $1.30, compared with $1.04 in 2007, and belatedly raised its price target to $18 from $13 — Altra had long since topped $13 and was trading at about $16.40 at the time of the earnings announcement on May 5.

Jefferies kept its rating at “hold” because the target was less than 15% from the actual price. The stock now has two “buys” and two “strong buys.” The mean price target is $19.50, compared with a high of $20 and the low Jefferies target of $18. The 52-week range is a high of $18.80 reached last July and a low of $11.07 in March.

Although Altra can trace its history back to the 1857 formation of T.B. Wood’s, one of the 19 brands in its portfolio, the company itself was cobbled together in 2004 and 2005 by the private equity firm Genstar Capital, and went public in December 2006. While the individual brands operate autonomously, they are supervised by the parent operating company, Altra Industrial Motion, Inc., based in Quincy, Mass., and follow the “Altra Business System,” which is modeled after the Toyota Production System and includes the Kaizen continuous business improvement concept designed to eliminate inefficiencies.

The global mechanical power transmission market is highly fragmented, with over 1,000 small manufacturers generally focused on regional niche markets with narrow product lines. Larger companies such as Altra that generate annual sales of over $100 million offer a broader range of products and have global capabilities. The industry’s customer base is diversified across many sectors and looks at factors such as quality, reliability, availability, and design and application engineering support.

Altra claims to hold the No. 1 or No. 2 market position in key products across several core platforms. It also claims to derive more than 50% of sales from products where it holds the No. 1 or No. 2 share and brand recognition. The long history of T.B. Wood’s, Boston Gear (founded 1877) and many of the other brands makes for large installed customer bases that create significant aftermarket replacement demand and a recurring revenue stream. The company serves a diverse mix of industries, including energy, general industrial, material handling, mining, transportation, and turf and garden.

First-quarter sales were up 23% to $163.2 million, a full $10 million ahead of Jefferies’ forecast and reflect the April 2007 acquisition of T.B. Wood’s, a maker of couplings, sheaves and belted drives. Altra CEO Michael Hurt, 62, and COO Carl Christenson, 48, are both veterans of T.B. Wood’s, though both had left prior to the formation of Altra. Applying “Altra Business Systems” efficiencies to the new acquisition will wring out another $2 million in savings this year, the Jefferies analysts calculate.

Organic sales growth, without the acquisition and the impact of currency gains, would have been 3%, Jefferies says, or 6% on an equivalent days shipped basis, on continued strength in metals, mining, power generation, and aerospace and defense.

The Jefferies analysts praise Altra for strengthening margins in a difficult economic environment that includes gains in raw materials costs. They also give the company credit for strengthening the balance sheet — retiring $3 million of notes in the first quarter and accumulating $65 million in cash to retire further debt as soon as restrictions allow.

The average analysts’ estimate for 2008 revenue is $645 million, a gain of 10.4% on the year (the T.B. Wood’s figures were included in the other three quarters of 2007). The average EPS estimate for 2008 is $1.35 and for 2009, $1.49. For the current quarter, analysts are expecting $0.37, compared with $0.31 in the second quarter of 2007, and for the third quarter, $0.32, compared with $0.25. Altra has beat analysts’ earnings estimates in three of the past four quarters.

Altra closed on Friday at $16.85, giving it a market cap of $445 million. With its broad portfolio of motion-control equipment, Altra seems likely to chug along on a comfortable growth path that will support further rises in the stock price.

Disclosure: none