We believe that Alamo Group, Inc. ALG is a solid choice for investors seeking exposure in the machinery space. The company is poised to gain traction from its initiatives to augment operational efficiencies and improve end-market demand. Further, synergies from acquired assets will be beneficial. The company currently has a market capitalization of $1.4 billion.
The stock has been upgraded to a Zacks Rank #2 (Buy) on Nov 23.
Alamo Group reported better-than-expected results in two of the last four quarters, while lagging estimates in one and delivering in-line results in one. Average earnings surprise was a positive 6.12%. Notably, the company’s shares have rallied 30.2% in the last three months, outperforming 23% growth of the industry.
Why the Upgrade?
Before we begin, a brief discussion on Alamo Group’s results for the third quarter of 2017 has been provided. The quarter’s net income grew 25.4% year over year while net sales advanced 10.9% on the back of healthy growth in Industrial, Agricultural and European division sales. Backlog at quarter-end represented 31.7% growth in the year-ago quarter. Margin profile improved, with both gross and operating margins increasing 180 basis points year over year.
We believe that the company is well placed to gain traction from its diversified product portfolio and a solid network of over 6,000 dealers and distributors across nations. Further, it has a solid customer base in various end-markets, including government, agricultural, commercial turf, industrial and others. In the coming quarters, it believes that improving demand for products in the agriculture sector and snow removal will prove beneficial. This will be further aided by strengthening of vacuum truck business and favorable impact of foreign currency translation.
Alamo’s initiatives to improve operating efficiencies are also worth mentioning. Actions like consolidation of manufacturing locations, focus on technologically advanced equipment to lower input costs and leveraging benefits from group purchasing initiatives have been prioritised by the company. Further, initiatives include ensuring reduced lead times, improving assets usage and enhancing manufacturing efficiencies.
Additionally, Alamo’s acquisitive nature has helped in business expansion over time. In June this year, the company completed the acquisition of Virginia-based Old Dominion Brush Company, Inc. and Brazil-based Santa Izabel Agro Industria, Ltda. The Old Dominion Brush buyout will solidify the company’s infrastructure maintenance equipment and parts business, while Santa Izabel Agro acquisition will complement its Herder operation in Brazil. Moreover, the company acquired Canada-based R.P.M. Tech Inc in August. This asset will be integrated with Alamo’s Industrial division and strengthen its snow removal products offerings. In the first nine months of 2017, acquired assets generated net sales of $11.6 million.
The stock’s Zacks Consensus Estimate stands at $4.35 for 2017 and $4.83 for 2018, reflecting growth of 4.3% and 6.9% from their respective estimates 30 days ago.
Alamo Group, Inc. Price and Consensus