Description

Investment Thesis

We believe shares in Allied Motion Technologies (NASDAQ:AMOT) represent a compelling, long-term investment at current forward valuations. The company recently completed a few acquisitions that are transforming the company by expanding its downstream motion control solutions, which carry higher margins and offer accelerated forward growth.  

In FY2023, we see AMOT trading at ~13x EPS, under 8x EBITDA, and 12x FCF. We think this is cheap for a company that has a strong position selling mission-critical products that represent a small portion of overall end-product costs for their customers. We also see a longer-term roadmap to increase margins and accelerate growth, making out-year valuations even more compelling. If valuations do not increase, we think it is likely that a larger competitor will eventually take the company out. 

Allied Motion Technologies sells specialty motion components and systems used in a diversified set of end-markets. The company’s historic products include brushless motor-drives, gear motors, brushless servo motors and other motion control systems. These legacy products are mission-critical in various industries but are also relatively low margin. The company’s goal has been to move further downstream to offer total solutions, such as control systems, that offer higher margins and growth. The company set out on an M&A program to accelerate this integration into downstream systems. 

In the latter half of 2021, AMOT announced three company-transforming acquisitions. This slide from a recent company presentation provides more details on the targets:

The company paid a little over $100 million for these three companies, which is sizable when compared to the company’s current market cap of ~$380 million.  The acquisitions were paid for by a combination of cash and stock (at share prices significantly higher than today’s price), with a portion ($25 million) being paid over the next two years in milestone payments (we include this amount in current net debt).  These three acquisitions are set to add over $60 million in incremental revenue in 2022 with margins that are significantly higher than historic company margins. If these acquisitions were simply additive, the impact would not be as interesting as we believe they are. It is the expertise that comes with these companies that should transform the rest of the company and increase margins across the board.  

These acquisitions allow the company to take the motors that have historically been sold and utilize them in value-added motion control systems that demand higher margins and have a significantly higher growth profile. AMOT already had a program in place to increase margins by ~1% per year (the company reported a gross margin of 30% in 2021) and these acquisitions should significantly accelerate this program.  For a company with 12% EBITDA margins in 2021, every point of gross margin that can drop to EBITDA is significant and we see the company with robust mid-teens EBITDA margins by next year (we estimate an EBITDA margin of 15% in 2023).  We think this transformation will result in a significant valuation re-rating at some point as the market starts to appreciate the move away from more commoditized products.

Company Overview:

Allied Motion Technologies is a leading producer of motion control systems that are used in numerous global end-markets.  The company breaks down its business into five distinct operating units as follows:

Industrial

• 2021 revenue of $135 million or ~34% of company revenue

• End-markets include factory automation, robotics, tools, semiconductor equipment and oil & gas

Vehicle

• 2021 revenue of $130 million or ~32% of company revenue

• End-markets include off- and on-road construction and agricultural equipment, trucks, buses, RVs, marine, ATVs and utility vehicles

Medical

• 2021 revenue of $86 million or ~21% of company revenue

• End-markets include medical devices and equipment and surgical robots

Aerospace & Defense

• 2021 revenue of $32 million or ~8% of company revenue

• End-markets include commercial aviation, defense systems, UAVs, and NASA

Other

• 2021 revenue of $20 million or ~5% of company revenue

• End-markets are varied and include anything that does not fall under the above categories

Financials and Valuation

The company does not provide detailed guidance but has stated that the three acquisitions made in 2021 should add at least $60 million in incremental revenue in 2022 (off a base of $404 million). Organic growth has been in the low-to-mid single digits.  Taken together, we see 2022 revenue of ~$476 million (up 18% yoy). Prior to the acquisitions, AMOT was guiding for an increase in gross margin of ~1% per year. We see margins increasing ~1.5 ppts in 2022 and we think we are being relatively conservative by assuming another 1 ppt in 2023. These gross margin increases should drop to the bottom line and there should be further opex leverage as acquisition overhead is removed. 

EBITDA (amortization of intangibles should be almost 40% of D&A in 2022) margins in 2021 were ~12.3% and we see these increasing to 14% in 2022 and almost 15% in 2023.        

In FY2023, we see revenue of over $500 million, EBITDA of ~$70mm, and EPS of ~$1.80.  In addition, FCF should approach $25 million in FY22 and over $30 million in FY23. Our model assumes no acquisitions and continued debt paydown.  

Under these assumptions, we see AMOT trading at ~13.5x FY23 EPS, ~7.4x FY23 EBITDA and ~12x FCF. The company’s closest competitor, Ametek (NYSE: AME), trades at over 20x EPS and 15x EBITDA.  Ametek certainly deserves to trade at higher multiples due to its higher margin profile, but we think the difference is too great and that some company will end up buying AMOT if valuations do not improve.

As AMOT moves through its company transformation, we think it deserves to trade at a mid-to-high teen earnings multiple which is at the low end of comps.  This would bring us to a valuation of ~$31.50/share, which is ~17.5x EPS, which we think is reasonable for a growing company that is expanding margins and is a likely M&A target.  We see 30% upside over the next year or so as our base case. 

Major Risks

• Continued raw material inflation is clearly a risk but management has been able to pass much of this on with price increases that have also been implemented by other players in the industry  

• The company being too aggressive on further acquisitions. We feel comfortable that management is disciplined and will be patient for the right opportunities but the base case is to de-lever the balance sheet.  

Catalyst

- Margin profile should start increasing substantially over the next year (although this current quarter may be a bit weaker due to supply issues - we see any stock weakness based on these short-term issues as an opportunity

- Potential acquisition by a larger competitor.  It is likely that a large premium could be paid and would still be accretive due to high SG&A expenses that could be cut drastically as part of a larger organization.