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Why Is Altra (AIMC) Down 4% Since Last Earnings Report?

A month has gone by since the last earnings report for Altra Industrial Motion (AIMC). Shares have lost about 4% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Altra due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Altra Industrial Q1 Earnings Top, Margins Improve

Altra Industrial reported better-than-expected results for first-quarter 2019. Its earnings and sales surpassed respective estimates by 12.68% and 0.1%. The impressive bottom-line performance came in after the company recorded negative earnings surprise of 7.14% in the fourth quarter of 2018.

This machinery company's non-GAAP earnings in the reported quarter were 80 cents per share, surpassing the Zacks Consensus Estimate of 71 cents. Also, the bottom line increased 11.1% from the year-ago figure of 72 cents on the back of healthy sales growth and margin improvement.

Acquisition of Fortive's Business Drives Revenues

In the reported quarter, Altra Industrial's net sales more than doubled year over year to $482.8 million, driven by collaboration with four companies of Automation and Specialty business of Fortive. This collaboration was completed in the fourth quarter of 2018. Integration of Fortive's businesses was successfully completed in the first quarter of 2019. Organic sales in the quarter grew 1.6%.

Effective from the fourth quarter of 2018, Altra Industrial started reporting revenues under the following heads/segments — Automation & Specialty, and Power Transmission Technologies. A brief snapshot of the segmental sales is provided below:

Automation & Specialty's sales were roughly $249.1 million, slightly above $241.7 million generated in the previous quarter.

Revenues generated from Power Transmission Technologies amounted to $234.9 million, increasing 2.7% sequentially but down 2.3% sequentially.

Margin Profile Improves

In the reported quarter, Altra Industrial's cost of sales surged 85.3% year over year to $307.9 million. It represented 63.8% of net sales versus 69.1% in the year-ago quarter. Non-GAAP gross profit was $174.9 million, up 135.7% year over year. Also, gross margin improved 530 basis points (bps) to 36.2%.

Selling, general and administrative expenses increased 82.4% year over year to $71.5 million and represented 14.8% of net sales. Research and development expenses were $15.3 million versus $6.5 million in the year-ago quarter.

Non-GAAP adjusted EBITDA were $105 million, with margin being 21.7%. Conversely, non-GAAP operating income in the reported quarter grew 209.1% year over year to $88.1 million, with non-GAAP operating margin increasing 630 bps to 18.2%.

Net interest expenses totaled $19.8 million in the reported quarter versus $1.8 million recorded in the year-ago comparable quarter.

Balance Sheet & Cash Flow

Exiting the first quarter, Altra Industrial's cash and cash equivalents were approximately $152.4 million, down 9.8% from $169 million recorded in the last reported quarter. Long-term debt was roughly $1,676.6 million, slightly below $1,690.9 million in the last reported quarter. During the quarter under review, the company repaid long-term debts of $15 million.

In the first quarter, Altra Industrial generated net cash of $39.3 million from operating activities, significantly above $3.7 million recorded in the year-ago quarter. Capital invested for purchasing of property, plant and equipment doubled year over year to $14 million. Free cash flow in the quarter was $25.3 million versus cash outflow of $3.3 million in the year-ago quarter.

During the quarter under review, the company paid dividends amounting to $11.1 million, above $5 million distributed in the year-ago quarter.

Outlook

For 2019, Altra Industrial anticipates benefiting from efforts to optimize supply chain, program related to sales collaboration and gaining from efforts to lower debt profile. Also, the collaboration with Fortive's Automation and Specialty business will be beneficial, with synergies of $10-$12 million anticipated in 2019 and $52 million by the fourth year.

The company maintained sales projection at $1,920-$1,950 million for 2019. Non-GAAP earnings are expected to be $3.02-$3.18 per share and non-GAAP adjusted EBITDA is anticipated to be $415-$430 million.

The tax rate is anticipated to be around 24-25.8%, down from previously stated 25-26.5%. Capital spending is expected to be approximately $60-$65 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, Altra has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, Altra has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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