About a year ago, I called Astronics (NASDAQ:ATRO) (OTCPK:ATROB) still no high-flier after the former roll-up story has seen real stagnation. Ever since, the company has continued to deliver on modest improvements, posting double-digit sales growth while demonstrating on modest operating leverage, amidst a growing backlog.
This was all to be applauded, but real profitability is still not achieved, as further margin gains are needed to unleash the potential from a current low sales multiple. With the pace of progress feeling a pinch too slow, as the company is held back by losses in its test segment, there are bright spots coming up with improvements seen in this segment.
This makes me upbeat, wiling to initiate a small position, although I lack conviction to hold a position in size.
Stagnation
Astronics services aerospace, defense, and other mission-critical industries with its innovative technology solutions. Founded in 1968, and having gone public just four years later, it is the goal of the business to develop this technology to grow the business and serve its clients.
The company grew sales from just above $150 million in 2007 to about $800 million a decade later, aided by acquisitions which diluted the share count by about two thirds. By now, the company has been struggling as double-digit operating margins in the early 2010s, fell to mid-single digit margins in 2017. By now, shares had come off their highs around $50 per share in 2015.
Worse, sales fell to the half a billion mark during the pandemic, for obvious reasons, as the company started to incur losses. This still is happening until essentially today, even as shares have rebounded to over three quarters of a billion.
Some 90% of current sales are generated within aerospace, the remainder from test systems. Within aerospace, the company relies on about two-thirds from commercial aerospace, and the remainder from defense & government and general aviation.
Expectations Cool Down
With the company posting losses since the pandemic, shares fell to the $10 mark at the time, and shares have mostly traded in a $10-$20 range ever since.
When I looked at the shares in August of last year, shares traded around $16 per share as the company commanded just over $500 million equity valuation, a number which excluded a $150 million net debt load. The resulting $650 million enterprise valuation valued the business at just over 1 times sales after 2022 sales rose by 20% to $535 million, still accompanied by a $30 million loss.
Amidst a growing backlog, the company guided for 2023 sales to rise to a midpoint of $660 million, which undoubtedly would aid on the bottom line as well after the company saw a minimal second quarter operating profit. With the company trading around 1 times sales, while posting break-even levels, I was growing more upbeat on the operating momentum, but disappointed that no real profits were reported that year.
All this made me upbeat on the low sales multiples, but given the dismal performance, I was cautious to get involved just yet.
Settling Down
Shares of Astronics have steadily grown to the low-twenties over the last year, trading at a high of $23 per share, but shares have recently settled down to $19 per share.
Earlier this year, Astronics posted its 2023 results. The company grew full-year sales by nearly 29% to $689 million, as operating losses narrowed to $6 million, while EBITDA five-folded to $55 million. Fourth quarter sales rose by 23% to $195 million, as the company posted an operating profit of nearly $8 million in the final quarter. With annual bookings coming in at $724 million, a 1.06 book-to-bill ratio added to the backlog, with 2024 sales seen up between $760 and $795 million.
In May, Astronics reported an 18% increase in first quarter sales to $185 million, with bookings coming in as high as $205 million, adding to a backlog over $600 million. The company managed to post GAAP operating profits of $1.7 million, still yielding a net loss of around $3 million, as the improvement on the bottom line came in at around $4 million.
Shares sold off from the high-twenties to $19 per share in August as the company posted its second quarter results. Revenues growth slowed down to 14% with sales reported at $198 million. The company tripled operating income to $7.5 million, as the company posted a GAAP profits of $1.5 million.
Bookings of $219 million were strong, with the book-to-bill ratio reported at 1.11 times, growing the backlog to $633 million. Amidst the minimal profitability, net debt remains somewhat elevated at around $170 million, with EBITDA trending around $80 million, for a leverage ratio just over 2 times.
By now, the company guides for full-year sales at a midpoint of $790 million, suggesting a quarterly run rate in excess of $200 million for the coming quarters.
Room For Improvements
With the 35 million shares of the company trading in the high-teens, and given the current net debt load, a current enterprise valuation of just over $800 million is equal to about 1 times sales.
The issue is that the company is still largely breaking-even at best, as the progress of margins improvement is limited, and thereby the earnings power of the business. There is room for improvement, however, as the company’s test systems are posting significant losses (like it has done for a long period of time already).
Revenues of the test systems business trend at $80 million a year, while the segment posts losses to the tune of $15-$20 million. If the company could divest these assets, it could add $20 million to the bottom line, meaning that break-even results could see a sixty cent pre-tax profit improvement, which arguably would be compelling.
That is not to happen as the company is looking to organically turn the ship in this segment, with yet another restructuring, but also some positive news on the commercial side. This came after the company was awarded the US Army’s radio test program, which it believes will bring $215 million in sales in the coming years, bolstering hopes for the business.
What Now?
With the company sticking to the test business and promising improvements, I guess investors have to look forward to gradual improvements from here, as it happens right now.
Trading just over 1 times sales, the company is making gradual inroads, as the modest pace of improvements means that I lag conviction. That said, progress is made, modest margin gains are achieved, interest expenses come down after a refinancing, with all of this setting the company up for gradual profit improvements.
Amidst all this, I am gradually turning more upbeat on the shares, looking to buy dips from here for a modest position.
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