Marvin Samuel Tolentino Pineda
In Might, I concluded to filter the general public providing of Atmus Filtration Applied sciences (NYSE:ATMU) as engine producer Cummins (CMI) spun out its filtration enterprise. Whereas valuations have been something however demanding, I feared a company value overhang and the long-term positioning of the enterprise, making this a show-me story.
The second quarter earnings outcomes revealed that many of those fears haven’t materialized, though that some headwinds could be seen within the second half of the yr, making me a bit cautious to get entangled with the shares right here simply but.
A Fast Recap
Atmus is the previous filtration enterprise of Cummins, offering filtration merchandise for each on-highway industrial automobiles and off-highway agriculture, building, mining and energy producing automobiles. Designed to decrease emission and enhance asset safety, many of those merchandise are offered underneath the Fleetguard model.
Being in enterprise for over 60 years, the corporate generates about $1.5 billion in gross sales, half of that are associated to gas, complemented by lube, air, air flow, chemical compounds and hydraulics. Focusing on an addressable market of $13 billion in a $70 billion complete filtration market, development alternatives must be plentiful.
Whereas the electrification is a menace to the long-term enterprise mannequin, it’s really a close to to medium-term driver in addition to emission requirements initially change into stringent for a lot of candidates earlier than going electrical. Purchasers of the enterprise embody the anticipated and enormous title OEMs like CNH, Deere, Daimler, Komatsu and naturally its father or mother firm Cummins.
Within the IPO in Might, some 14 million shares have been supplied at $19.50 per share, as 83 million shares excellent granted the enterprise a $1.62 billion fairness valuation on the supply value, though this excludes a $540 million professional forma web debt load. This close to $2.2 billion valuation was utilized to a enterprise which grew gross sales from $1.23 billion in 2020 to $1.44 billion in 2021 and $1.56 billion in 2022, whereas working earnings got here in round $200 million in every of those years.
Web debt of $234 million labored right down to a leverage ratio at 2.3 instances, as professional forma earnings have been seen round $1.50 per share, or $128 million in greenback phrases. With first quarter gross sales up 10% to $418 million, working earnings rose from $44 million to $58 million. The debt allotted to the agency meant that curiosity expense have been incurred, with curiosity bills seen flat round $35 million, and earnings trending at $1.70 per share.
With shares buying and selling at $22 after the primary day or buying and selling at 12-13 instances a number of regarded cheap, there have been considerations. These associated to cyclicality of the enterprise, buyer focus, a managed standing, the allocation of company value overhead and naturally the transition to electrification.
Buying and selling Flat
Since Might, shares of the corporate have traded in a $19-$25 vary, now buying and selling on the center of the vary at $22 per share, just like the degrees at which shares traded on the primary day of buying and selling.
In August, Atmus posted second quarter gross sales of $414 million, up 5% from the yr earlier than. Working bills rose by greater than 10% to $64 million, however after curiosity bills and better taxes, earnings fell from $49 million to $46 million, with earnings reported at $0.55 per share.
The corporate guided for full yr gross sales between $1.58 and $1.63 billion. As gross sales got here in $56 million forward of final yr within the first half of the yr, gross sales are seen flattish within the second half of the yr. Full yr adjusted EBITDA is seen round $285 million which implies that leverage ratios have quickly fallen beneath 2 instances, with web debt reported at $510 million.
Full yr adjusted earnings are seen between $2.05 and $2.25 per share, even a bit higher than my professional forma earnings estimates on the time of the IPO. This look fairly good, because the overhang of company value is just not actually evident within the second quarter. That stated, adjusted earnings at a midpoint of $2.15 per share this yr reveals that earnings are solely seen at $0.84 per share within the second half of the yr after the corporate posted an adjusted earnings variety of $1.31 per share within the first half of the yr, suggesting both vital seasonality or company value overhang.
What Now?
The truth is that the primary earnings report submit the IPO has been fairly good and that leverage has come down a bit already, each optimistic indicators. That stated, the total yr steering suggests some sequential weak spot, both because of the seasonality of the enterprise, normal enterprise efficiency, or company value overhang, and certain a mix of all these components.
These and the questions on the long-term enterprise outlook are regarding traits, as I sit up for the approaching earnings experiences to study extra in regards to the company value overhang and seasonality of the enterprise, earlier than probably contemplating a small allocation.
