Alta Equipment: Growth At A Reasonable Price

Summary

• Alta Equipment has the potential to improve its profitability in the future, as the revenue contribution from high-margin parts sales and service sales increases over time.
• M&A is another key growth driver for Alta Equipment, with the company having done seven acquisitions in 2020 at a reasonable average valuation of 4.4 times EV/EBITDA.
• Alta Equipment trades at consensus forward FY 2021 EV/EBITDA and Enterprise Value-to-Revenue of 7.1 times and 0.8 times, respectively.
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Elevator Pitch

I assign a Bullish rating to equipment dealer Alta Equipment (NYSE:ALTG).

Alta Equipment has the potential to improve its profitability in the future, as the revenue contribution from high-margin parts sales and service sales increases over time. M&A is another key growth driver for Alta Equipment, with the company having done seven acquisitions in 2020 at a reasonable average valuation of 4.4 times EV/EBITDA. On the flip side, Alta Equipment's key risk factors relate to its high financial leverage, and the company's relationships with OEMs.

The market values Alta Equipment at consensus forward FY 2021 EV/EBITDA and Enterprise Value-to-Revenue multiples of 7.1 times and 0.8 times, respectively, which I see as reasonably attractive considering the company's growth potential with respect to high-margin parts & service sales and M&A.

Company Description

Established in 1984, Alta Equipment is referred to as a company which "owns and operates one of the largest integrated equipment dealership platforms in the U.S." and it positions itself as a "one-stop-shop" for customers' "equipment needs by providing sales, parts, service, and rental functions under one roof" in its press releases. The company derived 51% and 49% of its 9M 2020 revenue from its construction equipment (e.g. lift trucks) and industrial equipment business segments, respectively.

Alta Equipment's Brand Portfolio, Service Offerings And End-Markets

Source: Alta Equipment's 3Q 2020 Earnings Presentation Slides

Alta Equipment's Geographic Presence

Source: Alta Equipment's 3Q 2020 Earnings Presentation Slides

Growing High-Margin Parts & Service Sales Business

Alta Equipment's revenue mix indicates a potential for margin expansion, as the company continues to increase its revenue contribution from high-margin revenue streams such as parts sales and service sales.

In the first nine months of FY 2020, Alta Equipment generated 46%, 22% and 32% of its top line from equipment sales, rental revenue, and parts & service sales, respectively. But Alta Equipment's parts & service sales business achieved a very high gross profit margin of 41% for 9M 2020, while the gross profit margins for its equipment sales and rental business are much lower at 13% and 21%, respectively. This is not surprising, as parts & service sales typically generate higher margins.

It is also noteworthy that Alta Equipment's revenue contribution from the parts & service sales business continues to grow. Revenue for the parts & service sales businesses increased by +47% YoY from $127.2 million in 9M 2019 to $186.4 million in 9M 2020.

More importantly, Alta Equipment has a clear intention to expand the company's parts & service sales business. In the company's 3Q 2020 results presentation slides, Alta Equipment disclosed that it had "added approximately 70 technicians in the quarter through expansion and organic efforts" and noted that "skilled technicians are essential to providing aftermarket parts and service that customers require."

M&A Is Another Key Growth Driver

Apart from recruiting new technicians to grow its parts & service sales business, mergers & acquisition or M&A is also a key growth driver for Alta Equipment in terms of top line expansion and increasing the number of skilled technicians (via the acquisition of companies and their respective employees).

In the company's 2020 shareholder letter, Alta Equipment revealed that it has acquired 20 equipment dealerships in the past 12 years, which included seven new acquisitions in 2020. Alta Equipment's most recent M&A transaction was the acquisition of the assets of Vantage Equipment announced on December 18, 2020. Vantage Equipment is "a privately held construction equipment dealer operating three branches across New York State in Batavia, Syracuse and Albany" according to Alta Equipment's media release.

Alta Equipment has disclosed that it "has deployed $151 million in capital into strategic acquisitions" in 2020, and these acquired companies are "contributing approximately $34 million in adjusted EBITDA." This translates into an attractive average EV/EBITDA multiple of 4.4 times for the company's acquisitions in 2020.

It is worth spending some time to understand why Alta Equipment has access to so many M&A opportunities, and is able to acquire companies at a reasonable valuation at the same time.

In its 3Q 2020 results presentation, Alta Equipment calls itself "a preferred consolidator by both Volvo (OTCPK:VOLAF) (OTCPK:VLVLY) (OTCPK:VOLVY) and Hyster-Yale (HY)" and highlights that it is a "Top 4 Hyster-Yale dealer nationally" and the "#1 ranked JCB dealer in network." In other words, Alta Equipment faces limited competition in acquiring new equipment dealerships, because not every acquirer will be able to obtain approval from the OEMs to continue distributing their equipment.

Moving forward, Alta Equipment has guided that the company "has a robust pipeline of accretive acquisitions." More importantly, new acquisitions translate to higher new equipment sales which in turn lead to an increase in parts & service sales, while the company increases the total number of technicians it has with the addition of new equipment dealerships.

Valuation

Alta Equipment trades at consensus forward FY 2021 EV/EBITDA and Enterprise Value-to-Revenue multiples of 7.1 times and 0.8 times, respectively. I have obtained the sell-side analysts' forecasts used in this article from S&P Capital IQ.

As per the peer valuation comparison table below, the company's EV/EBITDA valuations are reasonably attractive (right in the middle of the pack) as compared to peers.

Alta Equipment's Peer Valuation Comparison

Stock	Consensus Current Year EV/EBITDA Multiple	Consensus Current Year Enterprise Value-to-Revenue Multiple
H&E Equipment Services, Inc. (HEES)	6.0	2.0
Herc Holdings Inc. (HRI)	5.2	2.1
Titan Machinery Inc. (TITN)	9.0	0.4
Nesco Holdings, Inc. (NSCO)	7.0	3.0

Click to enlarge

Source: Author

Risk Factors

Alta Equipment's key risk factors are its relatively high net debt-to-EBITDA ratio of 3.6 times as of September 30, 2020, and a potential deterioration in its relationships with OEMs. Its high gearing is partly mitigated by the company's limited refinancing risks and strong liquidity position. Alta Equipment has no significant debt maturing till 2025, and it has around $150 million of liquidity as compared with its total debt of $329.7 million. But Alta Equipment's relationships with OEMs are critical to both the company's growth prospects. If Alta Equipment's relationships with OEMs deteriorate, it could possibly lose the exclusive distributorships for certain OEM brands, and also find it challenging to acquire new equipment dealerships.

Analyst’s Disclosure: I/we 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.