Is anyone concerned by the recent insider selling by directors, the CEO and a large 8% shareholder? In total they've sold 110,000 shares, or over $3 million in the past month...
Please explain how insider selling can be construed as a positive. Generally, I would think that it means that the sellers feel the stock is overvalued.
I am increasing the position slowly as it continues to move higher. The seasonality of the Global business with regards to bookings would show up in backlog. At December 31, 2013, backlog was $75.6 million. At December 31, 2014, backlog was $75.1 million. A decline in backlog generally doesn't bode well in terms of organic growth for 2015. The declining trend in revenue and EBITDA in Q4 was also troublesome.
I tend to look at EBITDA, as it represents the earnings that are generated by the company that are available to all stakeholders (debt and equity). I also only look at the last 4 quarters as the Globe acquisition was fully accounted for in those periods. The trend is as follows:
Q1 2014 - $6.3 million
Q2 2014 - $7.3 million
Q3 2014 - $9.2 million
Q4 2014 - $8.0 million (excluding one-time benefit in SG&A)
Given the weak Q4, both in terms of revenue and EBTIDA, I'm surprised by the 40% increase since the earnings announcement. My short thesis has 3 factors:
1. The company's orders in Q4 were weak, with backlog falling below 2013 year end levels and showing a negative trend over the year.
2. The company is trading at approximately 12.5x EV / EBITDA. The company operates in an industry that typically trades at 8x - 10x EBITDA, depending on growth. Organic growth for this business is not as strong as what's being reported as a result of the acquisition. Revenue growth on an organic basis was 10% last year, and with the decline in orders in Q4 and drop in backlog, I would expect lower organic growth in 2015. The company also only has $250 million of sales, so it is very small. Smaller companies typically trade at much lower EV / EBITDA multiples. Given the slowing growth rate and small size, I would argue that a 8x-9x EBITDA multiple is fair for the business. That puts the share price down in the $20-$25 range. This is my primary reason for shorting!
3. While the insider selling isn't a huge consideration, it's typically a negative.
I was actually one of those longs earlier last year as I felt the company was undervalued. But that was when it was trading at $12 - $14. Now that it's close to tripled in 6 months, the pendulum has swung too far in the other direction. I expect things to normalize here with the stock falling back to the $20's once the momentum players lose interest.
In situations where leverage is high, P/E multiples are less meaningful of a valuation indicator than EV / EBITDA multiples (especially if you're applying those multiples to an earnings number than hasn't been normalized for one-time items). A 20x P/E for a $250 million sales industrial company with ~10% organic growth and high leverage is a steep multiple to pay. Time will tell.
Not worried. Like I said, I was a long here last year, I'm not looking to bad mouth AMOT. I'm just trying to understand the long case at this particular price level. Have a good weekend as well and good luck to you.
$82 million of AMOT's $250 million of revenue came from foreign operations, mostly in Europe. The Euro has depreciated 12.5% since year end and 22.5% since March 31, 2014. On average for the first quarter, 33% of the company's overall sales will be worth 20% less year / year due solely to currency... That's an 8% headwind just on currency...
They don't use currency hedges. They sell their goods in Euros, but their costs in those geographies are also in Euros, so no double hit with the decline in the Euro. It's a natural hedge when you have both sales and costs in the local currency.
The major impact is just going to be on the reported results, which are in US dollars. So any profitability in those regions will have to be translated from Euro to Dollars, which due to the currency movements, will be worth 20% less in USD year over year.
The trend looks like its reversing here. The market is worried about global growth and slow growth in Q1. GE's industrial segment report a 1% decline in sales in Q1, partly due to the strength of the US dollar. Today's market drop reflects those fears. VIX is still quite low near 15 so fear could escalate and losses could accelerate.
Take a look at the recent Q1 headlines from industrial companies with exposure to international markets:
"Strong dollar weighs on United Tech sales"
"GE Q1 Earnings, Sales Decline, On Cheap Crude, Pricey Dollar"
"DuPont Forecasts Larger Foreign Exchange Hit as Sales Slip"
AMOT will be exposed as well with 1/3 of the business overseas. With the Euro being down 20% relative to the dollar year over year in the first quarter, it will prove to be a drag on AMOT's sales. US sales growth would need to be 5%+ organic increase in US sales to just have AMOT post a flat sales quarter, and that's assuming their European business was flat in Q1, which is in doubt given all the weakness in Europe...
What will happen to the stock when its no longer reporting 100%+ revenue increases and instead is posting flat to down revenue???
There is no way they would be able to issue a million shares at these prices... They would have to price the shares at a pretty significant discount in order to sell a million shares. Secondaries typically go out at discounts to current price and even more below current price when it's for a company this size, with illiquid trading, and at overvalued levels.
Either way, it won't happen until after they post Q1 results, at which point the stock will be back down to more reasonable levels...
I think your logic is flawed. They would under your case issue $40 million of shares, get ~$40 million of cash, pay down debt, and still have $35 million of debt. (I would argue that there would be a significant discount to current price in the case of an equity issuance for valuation reasons discussed below, but I'll humor you) What would they use to fund the acquisition? Issue additional shares? They have no cash, still have debt... I don't think a seller of a business would take shares at this value. They would do the same analysis I'm doing and any logical investor would do. What's the value of the business?
This is a small $30 million EBITDA business that deals with basic motors for industrial purposes. They are not producing a sophisticated product at all, or a product that has proprietary technology. They are a small player in a large industry with much more capable and strong competitors. That's why you see the margins being so low, they don't have any power to command higher margins/prices, its more of a commodity type product.
Small industrial companies like this are typicall valued at 8x - 9x EBITDA at the highest end. $30 million of EBITDA x 9x = $270 million value of the business, less debt of $75 and plus cash of $13 give you an equity value of $208, divided by the number of shares gets you $22.60 per share...
A seller would take the equivalent # of shares that get him the true value of the business, and that would mean significant diluation of value to existing holders at current prices, then throw in execution risk with integration (though I will admit its a bit mitigated given their recent success with Globe).
I have nothing against this business or management, I just think the share price has gotten well ahead of itself.
All this discussion is moot in my opinion as the price will not be at this level once Q1 results are announced. Just look at the headlines from other companies on the effect of the stronger dollar...
From the Company's 10-K:
The Company believes there are numerous competitors in the motion control market, many of which are substantially larger and have greater resources. Competition involves primarily product performance and PRICE, although service and warranty are also important. Anytime you're competing on price with numerous larger competitors, it means you don't have much power in terms of pricing. Maybe commodity was the wrong word to use, but I think you get my point.
A dividend raise??? They're currently paying $0.10 a share in dividneds a year, thats a 0.0025% yield at current prices... I dont think anyone owns this because of the dividend... or would buy if they even quadrupled the dividend...
In regards to a share raise, they would have to go at a significant discount, that's why they won't do it (even though doing it at $30 per share would be value accretive), but nonetheless...
This is why you lock in profits when your stock is overvalued by 80% - 100%... Uptrend is broken. Momo players will be rushing for the exits. Q1 results will be bleak. $20's are coming next week...
How in the world do you expect the company to post earnings of $1.80 this year? I'm getting close to $1.35 and that's assuming growth of 5% on sales this year. I'll spell it out for you... $32 million EBITDA less $7.5 million depreciation & amortization, less $6 million interest expense give you earnings before taxes of $18.5 million, using a tax rate of 32% (could actually be closer to 35%-38%), gives you net income of $12.58 million, and EPS of $1.36 using 9.2 million shares out.
A reasonably high P/E multiple for the company given its size, industry, levereage, and organic growth would be in the 15x-18x range, implying a value of $20 to $24... Do the math
Only people buying are those who are closing out their short positions... Closed about 1/3 of my position today at $33 and below. Will look to reload if this moves back abover $35 before earnings...
I'm down to about 50% of my peak short position after having covered some more this morning around $32.10. I would definitely consider shorting more if this went above $35 before the Q1 earnings. I still think fair value is closer to $20 or $25 than $35 or $40...
Great call here as the stock had just overshot to the upside. I hope we were able to convince a few longs to at least sell some of their holdings when the stock was $40. I've trimmed back my short even more as the risk/reward holding into earnings just isn't as great when it's trading at $29 versus $40... Still think fair value is around $20 to $25, but not much upside left to being short here, especially with the drop this has seen over the past week.
Still plenty of downside risk. I'm out of my short at this point, but I wouldn't be surprised if this fell even more. As I've said all along, they're going against some rough headwinds with Q4's weak orders, the decline in backlog, and currency. I think a good quarter is in the range of $0.35 EPS. It wouldn't surprise me if the stock dropped even further after reporting $0.35 as fair value as I've been saying all along is in the $20 - $25 range. Upper $30's and low $40's were a gift longs should have taken... Good luck to you.
Results hurt by foreign currency... who knew
Good luck to remaining longs, I should have kept a bit of my short position, but the risk/reward wasn't as compelling at $29. May be a good buy around $20...