In a world which is getting more electrified in terms of its power supply and usage, a name like Advanced Energy Industries (NASDAQ:AEIS) surfaced on my radar. The company has a decent (deal making) track record, and is well positioned, but recent operational performance has been coming in a touch light.
Weighing all these factors together I see appeal increasing with shares down a third from last year's highs as softer performance has been fully priced in, with shares now trading at a non-demanding multiple.
Advanced Energy is not known by too many investors as it seems, so a thorough introduction seems warranted. The company provides precision power for the digital economy as a manufacturer and developer of precision power conversion and control solutions, used in high value and long life-cycle applications. The business has been operating some four decades already, with operations commencing early in the 1980s.
This process power equipment is key to connect grid power to actual applications which includes semiconductor equipment, industrial and medical applications, data center computing and telecom and networking applications.
These fourth target markets together comprise a $9 billion sellable addressable market as leadership positions in each of these markets made that the business generates nearly $1.5 billion in revenues. The business is solidly profitable, with operating profits of just over $200 million translating into mid double-digit operating margins.
The digital economy accelerates growth in the four sub sectors which the company targets, with developments like 5G, AI and IoT driving increased demand for Advanced’s products. Besides this sound positioning, the company has been growing on the back of deal making as well. Since the year 2014 the company has made some 10 deals at a combined cost of little over half a billion, in a move which added three quarters of a billion in revenues, now responsible for half of total revenues.
With earnings close to $5 per share in 2021 the company has set ambitious targets which includes a $6 earnings per share target for year-end 2022 and a goal for earnings of $7.50 per share in 2023. The company furthermore set ambitious 6-8 year goals which includes a $2.5 billion revenue number, 20% margin target and earnings close to $12 per share.
After the business was founded in the 1980s and the company went public in the 1990s, shares had seen some momentum around the dotcom bubble. What followed were years of stagnation with shares trading still at $20 in 2015, when the aggressive acquisition strategy started.
This change in strategy and increased demand has fueled shares as they hit the $100 mark in 2017, fell back to $40 in 2019, to trade at $120 again in 2021 before now rebounding quite a bit to just $77 per share.
We are seeing a volatile share price, for a business which seems well positioned, with improved operating performance seen in recent years. Early in February, the company posted its 2021 results with revenues up just 3% to $1.46 billion. That was about the good news as rising input costs hurt gross margins a bit as this resulted in some pressure on the bottom line as well.
The company posted adjusted net income of $183 million, or $4.78 per share which is down forty-five cents on the year before, with GAAP earnings posted at $3.51 per share with roughly forty cent of that discrepancy stemming from stock-based compensation, and the other items relating to amortization and restructuring efforts.
With shares trading at $77 per share, the nearly 38 million shares value equity of the operations at just over $2.9 billion. Included in this valuation is a near $150 million net cash position, equal to $4 per share. Adjusted for this, operating asset trade around $73 per share, with realistic earnings coming in around $4.50 per share, resulting in very reasonable multiples around 16 times earnings if we believe $4.50 per share number is realistic. That is for an unleveraged position, for a well positioned business, albeit that execution in 2021 was not too impressive.
While 2021 was a bit soft already, pressure on results is set to continue as the first quarter guidance is a bit underwhelming with revenues seen at a midpoint of $360 million, while non-GAAP earnings are seen at just $0.94 per share. As a refresher, the company posted $352 million in revenues this quarter last year, indicating modest revenue growth, yet earnings are set to take a beating as the company posted a $1.25 per share number for the first quarter of last year.
The problem is twofold as lower margins are a concern, but this is well explained and temporarily induced by inflation and supply chain issues. The other issue is more worrisome, that is softer sales growth, indicating a more deeply rooted issue, that of underperformance despite sound positioning, yet despite these issues the company reiterates its long term earnings guidance for the end of this year and heading into 2023.
To ignite a bit of operating momentum, Advanced reached a bolt-on deal to acquire SL Power early in April from Steel Partners Holdings L.P. (SPLP). The $144 million deal will deplete the net cash position but will add $66 million in revenues, indicating a 2.2 times revenue multiple has been paid, a multiple which actually represents a modest premium from the own valuation here.
The deal is set to provide a boost to the industrial and medical power application business of the company as the truth is that this looks like a reasonable deal, taking place at fair multiples while adding some 4-5% to pro forma sales. Unfortunately no margin details have been announced, or other clues about profitability were given in the press release, other than the comment that the deal is likely accretive to earnings per share.
The accompanied deal presentation shed more light on the deal, indicating that two-thirds of the acquired revenue relate to medical power solutions and that margins are similar to Advanced Energy, as this is comforting alongside the comment that $4 million synergies are seen in a year or two.
At current levels, I find myself a bit in doubt. Margins have taken a beating and while lack of materials and supplies are valid reasons, I cannot escape the feeling that the company is somewhat underperforming as well. On the other hand, net cash is flat even after the latest deal as the company trades at a just 16-17 times earnings here, while earnings are far from peaking and the long term positioning is sound, while the bolt-on deal should boost earnings by a few pennies as well.
Hence, I have a constructive stance, with shares down a third from the highs of last year, or actually a bit more. The valuation has been de-risked quite a bit, pricing in concerns relating to material inflation and competitive underperformance, as shares appear largely fairly to attractively valued here.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.