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Here's Why Investors Should Steer Clear of Altra Industrial

Zacks Equity Research

Altra Industrial Motion Corp. AIMC seems to have lost its sheen to softness in end markets, global economic uncertainties, forex woes and other company-specific headwinds.
The manufacturer of mechanical power transmission components, with a market capitalization of $2.1 billion, currently carries a Zacks Rank #4 (Sell).

The company belongs to the Zacks Manufacturing – General Industrial industry, currently at the bottom 21% (with the rank of 201) of more than 250 Zacks industries. We believe that the industry is suffering from global uncertainties, unfavorable movements in foreign currencies, softness in the housing market and weakness in industrial production in the United States. Cost escalation, resulting from tariff woes as well as commodity inflation, and high labor costs and freight charges, are also affecting the industry.

Notably, Altra Industrial’s third-quarter 2019 results were better than expected, with earnings surpassing estimates by 2.99%. However, the bottom line declined 2.8% year over year due to weak organic sales, and rise in costs and expenses. Average earnings surprise for the last four quarters was a negative 0.40%.

Over the past six months, the company’s shares have declined 4.4% against the industry’s growth of 7.8%.

Headwinds Impacting Altra Industrial

End-Market Weakness: The company is wary about the adverse impacts of uncertainties in end markets on its 2019 and 2020 top-line results. This along with global worries made it lower the sales projection for 2019 to $1,827-$1,837 million from the previously stated $1,850-$1,880 million. It predicts organic sales decline of 2.3%.

For 2020, the company predicts a year-over-year sales decline of 2-4%. It expects weakness in the Class 8 truck business to hurt sales by 2.2% in 2020.

It is worth mentioning here that the company serves various end markets, including construction, general industrial, mining, wind, water infrastructure and aerospace. Weakness in transportation, metals, factory automation & specialty machinery, agriculture, distribution, and turf & garden markets adversely impacted sales in the third quarter.

Bottom-Line Softness: We believe that high costs (resulting from rise in tariffs and input costs) and expenses might impact Altra Industrial’s profitability. In the third quarter of 2019, the company recorded an 82.7% increase in the cost of sales, 83.9% elevation in selling, general and administrative expenses, and 152.6% growth in research and development expenses.

For 2019, it lowered earnings predicted to $2.77-$2.83 per share from $2.81-$2.97 mentioned earlier.

International Exposure: Geographical diversification, with a significant presence in China, Germany, Europe and other countries, has exposed Altra Industrial to geopolitical issues, macroeconomic challenges and unfavorable movements in foreign currencies. Notably, lower demand in Germany and China adversely impacted the company’s organic sales in the third quarter of 2019. Also, forex woes had adverse impacts of 1.75% on sales in the quarter.

For fourth-quarter 2019, Altra Industrial expects unfavorable movements in foreign currencies to continue impacting its performance. It also anticipates softness in the global industrial economy to be a drag in 2019.

High Debts: We believe that a highly leveraged balance sheet can be troubling for Altra Industrial. Exiting the third quarter of 2019, the company's long-term debt was $1,602.8 million. Its interest expenses in the quarter totaled $18.2 million versus $2 million recorded in the year-ago quarter. We believe that rising debt, if unchecked, will increase its financial obligations and might prove detrimental to its profitability.

It is worth noting here that the company's long-term debt increased 73.1% (CAGR) in three years (2016-2018).

Stocks to Consider

Some better-ranked stocks in the Zacks Industrial Products sector are Tennant Company TNC, Dover Corporation DOV and The Middleby Corporation MIDD. While Tennant currently sports a Zacks Rank #1 (Strong Buy), Dover and Middleby carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

In the past 60 days, earnings estimates for these companies have improved for the current year. Further, positive earnings surprise for the last reported quarter was 40% for Tennant, 4.58% for Dover and 5.52% for Middleby.

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