Description

Astronova, Inc. (ALOT)

Summary

We focus on smaller companies with "Ft. Knox” balance sheets and large & sustainable free cash flow yields and we are typically seeking a double-digit FCF yield or higher on an unleveraged basis.  The objective is for the sustainable FCF to eventually drive up the share price to a more reasonable valuation through share buybacks, debt reductions, dividends, or accretive acquisitions.  Obviously, it is important we have a management team that cares about shareholder value.  We focus on small-cap stocks because there is a much better chance to find an attractive investment opportunity which is under-followed or undiscovered.

AstroNova, Inc. (ALOT) designs, develops, manufactures, and distributes specialty printers, and data acquisition, and analysis systems in the United States, Europe, Asia, Canada, Central and South America, and internationally. The Company operates through two segments, Product Identification (PI) and Test & Measurement (T&M). The PI segment offer tabletop and production-ready digital color label printers, as well as specialty OEM printing systems under the QuickLabel brand; digital color label mini-presses and all-in-one specialty printing systems under the TrojanLabel brand; and pressure sensitive labels, tags, inks, etc. This segment also develops and licenses various specialized software programs to design and manage labels and print images, as well as manage and operate its printers and presses on an automated basis; and provides training and support. It serves chemicals, cosmetics, food and beverage, medical products, etc. 

In the T&M segment, there are two groups including Aerospace and Test & Measurement. The Company was founded based on the Test and Measurement segment with NASA, but it has evolved as primarily an aerospace and defense business overall. The biggest focus in the T&M segment is the Aerospace business. The Company has a long history of using their technologies to provide networking systems and high-resolution light-weight flight deck and cabin printers for the aerospace market. In addition, the T&M segment includes data acquisition recorders, sold under the AstroNova brand, to enable their customers to acquire and record visual and electronic signal data from local and networked data streams and sensors. The recorded data is processed, analyzed, and stored and presented in various visual output formats.

Below is a video that provides a brief overview of the different types of products that ALOT creates. The Company has a comprehensive product portfolio.

https://www.youtube.com/watch?v=ig-drI4sPjE

ALOT’s shares currently trade at about $14 per share with about 7m shares outstanding for a market cap of about $98m. ALOT has a strong balance sheet with a net cash position of $1m as of 10/31/21. LTM EBITDA is about $10m, excluding government support payments. LTM free cash flow (FCF) is about $4m. ALOT is currently trading at about 10x LTM adjusted EBITDA despite its T&M segment operating at depressed levels.

We believe ALOT has a very strong and resilient business model which should produce strong results over the next 2-3 years.  Over the past two years, ALOT’s T&M segment has been highly depressed due to the grounding of the 737 MAX aircraft and sharply reduced air travel due to Covid-19.  We expect these factors to reverse over the next 2-3 years and this process has already started.  The T&M segment results could rebound strongly to levels achieved in 2018 and 2019 as 737 MAX production ramps up and domestic air travel continues to rebound.  Meanwhile, the PI segment has generated very strong results over the past two years to support the company while the T&M segment has been depressed.  We believe investors are pricing in almost no rebound in T&M from current levels.  We believe as T&M segment results rebound, ALOT’s consolidated results could improve sharply.  We believe ALOT could generate consolidated adjusted EBITDA of $17m+ by 2024.  ALOT has a capital-light, cash-generative business model with capital expenditures of $3m per year.  ALOT has a highly resilient business model with close to 65% of total revenues recurring in nature in terms of supplies and services.  We believe ALOT could trade for at least 10x adjusted EBITDA of $17m in 2024 with net debt of zero for a market cap of about $170m.  Based on 7m shares outstanding, ALOT would have a share price of about $24 per share or about 70% higher than the current price of about $14 per share.

Business Description:

ALOT leverages their expertise in data visualization technologies to design, manufacture, and market specialty printing systems, test and measurement systems, and related services for select growing markets on a global basis.

The business consists of two segments, Product Identification (“PI”) and Test and Measurement (“T&M). Product Identification products sold under the Quick Label, Trojan Label and Get Labels brands are used in brand owner and commercial applications to provide product packaging, marketing, tracking, branding, and labeling solutions to a wide array of industries.

The PI segment is currently largest segment as T&M results have been depressed. The PI segment has to do with both labeling products, creating labels that can go onto products, as well as labeling those products themselves on the packaging. This segment offers a variety of digital color label tabletop printers, high-volume presses and specialty OEM printing systems, as well as a wide range of label, tag, and flexible packaging material substrates and other supplies, such as ink and toner, allowing customers to market, track, protect, and enhance the appearance of their products.

In the T&M segment, there are two groups including Aerospace and Test & Measurement. The Company was founded based on the Test and Measurement segment with NASA, but it has evolved as primarily an aerospace and defense business overall. The biggest focus in the T&M segment is the Aerospace business. The Company has a long history of using their technologies to provide networking systems and high-resolution light-weight flight deck and cabin printers for the aerospace market. In addition, the T&M segment includes data acquisition recorders, sold under the AstroNova brand, to enable their customers to acquire and record visual and electronic signal data from local and networked data streams and sensors. The recorded data is processed, analyzed, and stored and presented in various visual output formats.

Over the last several years, ALOT has been set up in three regions including North America, Europe, and Asia. The North American hub is located at the headquarters in Rhode Island, United States. The European hub is based in Frankfurt, Germany and the Asia hub is based in Shanghai, China, with a satellite office for domestic business in Malaysia, as well as an Aerospace hub in Singapore.

ALOT currently has products in 155+ different countries, as shown in the slide below. All of the countries highlighted in purple have ALOT products and include active customers utilizing ALOT products.

ALOT’s growth playbook has four key elements including product innovation, strategic M&A, geographic expansion, and operational excellence.

Product Identification:

The PI segment includes three brands: QuickLabel, TrojanLabel, and GetLabels. The segment provides a wide array of digital end-to-end product marking and identification solutions including hardware, software, and supplies for OEMs, commercial printers, and brand owners. Their customers typically label or mark products on a short to mid-size run basis and benefit from the efficiency, flexibility, and cost-savings of digitally printing labels or packaging in their facility, on-demand, with the ability to accommodate multiple SKUs or variable data. QuickLabel brand products include tabletop printers, production-ready digital color label printers, and specialty OEM printing systems. TrojanLabel expands customer market by providing a range of higher volume digital color printers, OEM printers, and supplies that target the more demanding needs of brand owners, commercial printers, label converters, and packaging manufacturers, giving them the ability to digitally market or encode products directly or to produce labels for post-printing applications. GetLabels brand products include a full line of media supplies, including label materials, tags, inks, toners, etc.

The PI segment also develops and licenses various specialized software programs to design and manage labels, print images, manage, and operate our printers and presses, and coordinate printing on an automated basis directly over networked systems. PI also provides worldwide training and support.

Customers use their digital printing products in a wide variety of industries, including chemical, cosmetics, food and beverage, medical products, pharmaceutical, and others. The largest market for the PI segment is the food and beverage market. The big differentiator for A LOT are its prime labels, which means these are on the products you are actually going to buy and take home as a consumer, or even on an industrial basis.

The direct-to-package market is just taking off for ALOT because of their new breakthrough product, the T3-OPX, which allows the Company to print directly onto packaging. E-commerce is helping to drive this as well. The digital component of this market allows every label to be different. The mix includes custom-shipper boxes and online packaging, to-go meals and take-out containers, retail and prepared foods packaging, and custom printed gifts.

Digital Marketing Transformation

The COVID-19 pandemic accelerated plans to move to a digital platform company wide, but specifically in the PI segment. ALOT revamped their websites. There are a lot of demos on product information. The Company is now able to do a hybrid model for the customer, which allows a salesperson to be on-site but also provide support via ALOT’s technical support team through Zoom or another online platform. ALOT has found the hybrid model to be an effective way to develop new customers in the marketplace. They also moved their infrastructure to the cloud, which has been a big transformation for the company and allows for much greater efficiency.

Test and Measurement:

Products sold under their T&M segment are designed and manufactured for airborne printing solutions and data acquisition. Their aerospace products include flight deck printing solutions, networking hardware and specialized aerospace grade thermal paper. Their data acquisition systems are used in research and development, flight testing, missile/rocket telemetry production monitoring, power and maintenance applications. These products are sold to customers in a variety of industries, including aerospace and defense, automotive, commercial airline, energy, etc. Any plane you may fly on likely has ALOT products.

Airborne printers include their flagship Tough Writer series used in the flight decks and cabins of military, commercial, and business aircraft to print hard copies of data required for the sale and efficient operation of aircraft. Examples of printed data include navigation maps, arrival and departure information, flight itineraries, weather maps, performance data, etc.

Their core technologies are data visualization technologies that relate to 1) acquiring data, 2) conditioning the data, 3) displaying or printing the data on hard copy, monitor or electronic storage media, and 4) analyzing the data.

Below is ALOT’s comprehensive product portfolio. The Company seeks to execute a common strategic vision across three lines of business including Product Identification, Aerospace, and Test & Measurement.

Marketing

PI products are sold by direct field salespersons as well as independent dealers and representatives, while the T&M products are sold predominantly through direct sales and manufacturers’ representatives. In the United States, the Company has factory-trained direct field salespeople located throughout the country specializing in PI products. They also have direct field sales or service centers in Canada, China, Denmark, France, Germany, Malaysia, Mexico, Singapore, and the United Kingdom staffed by their own employees and dedicated third party contractors. Additionally, the Company utilizes over 200 independent dealers and representatives selling and marketing their products in over 60 countries.

No single customer accounted for 10% or more of our net revenue in any of the last three fiscal years.

Competition

ALOT operates in an environment of significant competition, especially in markets in which they sell PI printers and T&M data acquisition products. The competition is driven by rapid technological advances, evolving industry standards, frequent new product introductions and the demand of customers to become more efficient. The competitors range from large international companies to relatively small firms. ALOT competes based on technology, performance, price, quality, reliability, brand, distribution and customer service and support.

ALOT competes worldwide in multiple markets. Through the expanding network of manufacturing, sales, and support facilities, the Company now does business in over 150 countries.

ALOT believes they are a market leader in tabletop digital color label printing technology in the specialty printing field, a market leader in flight deck printers, and an innovator in digital color mini-press systems. In the data acquisition area, ALOT is one of the leaders in general-purpose portable, high-speed acquisition systems.

Management believes they have a market leadership position in many of the markets they serve. ALOT retains leadership positions by virtue of their proprietary technology, product reputation, delivery, their channels to market, technical assistance, and service to customers. The number of competitors varies by product line. Key competitive factors vary among product lines, but include technology, quality, service and support, distribution network and breadth of product, and service offerings. To remain competitive, ALOT must develop new products, services, and applications and periodically enhance their existing offerings.

Seasonality

ALOT is not seasonal in nature. However, revenue is impacted by the size of certain individual transactions, which can cause fluctuations in revenue from quarter to quarter.

Leading Market Brands and Positions in Growing Niche Markets

ALOT has a dominant market share in its T&M segment, especially in the Aerospace sub-segment where it has a very high market share in cockpit printers, especially in single aisle aircraft.  ALOT also has a very strong market share / position in its PI segment where we believe its share is at least 25% or higher.  We believe ALOT has either #1 or #2 market share in almost all its businesses.  We believe both the T&M and PI segments are in industries with solid long-term growth potential.

Strong Management Oriented Towards Disciplined, Long-Term Value Creation

CEO Gregory Woods took over the position in February 2014 and as director in January 2014.  Mr. Woods joined the Company in September 2012 as Executive Vice President and Chief Operating Officer and was appointed President and Chief Operating Officer on August 29, 2013. Prior to joining ALOT, Mr. Woods served from January 2010 to August 2012 as Managing Director of Medfield Advisors, LLC, an advisory firm in Massachusetts focused on providing corporate development and strategy guidance to technology driven manufacturing firms.  Woods led a division at Danaher, a highly successful publicly traded company.  Multiple investment firms with investing approaches that resonate with us have positions in the Company, including Askeladden Capital (6%) and Juniper Investments (6%).

Attractive Valuation with Expected Strong Growth in adjusted EBITDA and FCF in 2022 and 2023

ALOT is currently trading at about 10x EBITDA (excluding government support payments) despite depressed T&M segment results due to the 737 MAX shut down and to Covid-19’s impact on the airline industry.  We believe these headwinds are abating and will help drive improved adjusted EBITDA and free cash flow for ALOT over the next two years. We believe ALOT can sustainably generate free cash flow of $8m to $10m per year as these headwinds reduce.  This compares to its current enterprise value (EV) of about $98m and would result in an unleveraged free cash flow yield of almost 10%. We believe this is attractive when compared to 10-year treasury rates near 2%.

As shown in the chart below, even with the impact of the 737 MAX shut down and Covid-19 on the airline industry over the past two years, the Company has continued to generate a strong amount of profitability.  Solid results from the PI segment even during Covid-19 have supported ALOT during this period.  Regarding chart below, we are not including government support payments in LTM adjusted EBITDA so our LTM adjusted EBITDA number is closer to $10m.

Strong Cash Flow Generation and Highly Cash-Generative Business Model

ALOT has a highly cash-generative business model.  ALOT requires very modest capital expenditures of $3m or less per year (less than 3% of total revenues) to maintain its business.  The Company has a very cash-generative business model as a result.  We expect adjusted EBITDA to rebound strongly over the next 2-3 years and that a large share of adjusted EBITDA will convert to free cash flow.  We believe ALOT can generate more than $10m per year of free cash flow over the next few years.

Product Identification Results Have Been Strong Over Past Two Difficult Years

Product Identification segment results have been very strong over the past two years despite the difficult environment during Covid-19.  FYE Jan 2021 revenues for PI grew 2% in a very difficult year.  We believe PI revenue can continue to grow over the next few years and provide a strong base for a potential rebound of T&M revenues.  We believe this solid performance by PI speaks to the company’s strong niche position in the market and the growth opportunities for the Company going forward.

Aerospace Industry Rebound is Likely Over Next Two Years

The Aerospace industry was significantly impacted by 737 MAX production halt as well as COVID-19 in FY 2021. As that industry rebounds, ALOT can anticipate an uptick in earnings related to their Aerospace segment.

Strong and Resilient and Highly Recurring Revenue Business

Revenue is made up of roughly 78% Product Identification and 22% in the Test and Measurement segment. These numbers are trailing twelve months from the Q3 FY 2022 results. The Test and Measurement segment is down a fair amount from its peak due to its Aerospace component. This is due to a couple of events including the MAX crashes as well as the Covid-19 impact on the Aerospace and Defense sector. Management expects this percentage to grow as we move forward.

In terms of revenue, supplies make up roughly 62% in the LTM Q3 2022 results. There is another 11% which is service and other, as well as 27% for hardware. ALOT has a good chunk of the business that is recurring.  These revenues have proven highly resilient over the past few years.  While hardware revenue has declined as a percentage of total revenue, revenues from supplies and services have been very steady.  We believe that hardware revenue will rebound over time as the test and measurement segment strengthens, and as hardware revenue grows, the base for supplies and services revenue will grow over time, resulting in a highly resilient and reliable business model.

As shown below, revenues for supplies and services have held up strongly during the last two pandemic-impacted fiscal years and we believe this speaks to the strongly resilient and recurring nature of a large share of the Company’s revenue base.  We expect hardware revenues to rebound over the next two or three years on top of ALOT’s stable recurring revenue base and drive improved total revenues and adjusted EBITDA.

Track Record of Successful M&A

The Company has a demonstrated track record of successful M&A. Strategic M&A is a key driver of the business. The Company strives to strengthen their core competencies, extend their technology advantages to new end-markets, and/or add complementary technologies.

M&A activity remained dormant during the Covid-19 pandemic due to banking restrictions and PPP loan restrictions. As restrictions lift, the ALOT team is currently actively engaging in conversations with various companies. Management remains conservative and selective to ensure their M&A pipeline is the right deal, at the right price.

In 2017, ALOT acquired Trojan Label based in Denmark. They already had strong start in manufacturing digital color label presses and specialty printing systems. Trojan Label has a strong presence in EMEA and Asia and added 50 dealer partners worldwide. This acquisition significantly expanded the addressable Product ID Market and grew ALOT’s average monthly print volume.

“Ft. Knox” Balance Sheet Reduces Risk and Creates Opportunities

The Company has a “Ft. Knox” balance sheet today with a net cash position of $1m at 10/31/21 and a significant unused credit facility. We believe the Company’s strong balance sheet substantially reduces risk and gives the Company opportunity to take advantage of strategic opportunities which are both organic and inorganic.

Conclusion and Target Price

We believe as T&M segment results rebound and as PI segment results continue their solid and steady growth, consolidated results could improve sharply.  We believe ALOT could generate consolidated adjusted EBITDA of $17m by 2024.  ALOT has a capital-light, cash-generative business model with capital expenditures of $3m per year.  ALOT has a highly resilient business model with over 65% of total revenues recurring in nature in terms of paper and supplies.  A LOT has a dominant market position in the aerospace sub-segment in T&M segment and strong market share and positioning in the PI segment.  Therefore, we believe ALOT could easily trade for at least 10x adjusted EBITDA of $17m in 2024 with net debt of zero for a market cap of about $170m.  Based on 7m shares outstanding, Astro would have a share price of about $24 per share or about 90% higher than the current price of about $14 per share.

Catalysts

1. Leading market positions and brands
2. Strong free cash flow generation
3. Strong and resilient and highly recurring revenue business model.
4. Ft. Knox balance sheet protects downside and creates organic and inorganic investment upside.
5. Strong rebound in T&M segment as 737 MAX production increases and airline travel industry rebounds.
6. Expanding global footprint
7. Robust product development pipeline
8. Track record of successful M&A
9. Acquisition by strategic or financial player

Risks

1. Economy downturns sharply, and/or consumer spending is sharply curtailed.
2. Disruptions in the global supply chain due to Covid-19 pandemic.
3. Further pandemic-driven disruptions to airline travel industry or weaker recovery than expected.
4. New technologies replace printer demand in aircraft cockpits or in areas related to PI segment.
5. Markets into which ALOT sells products decline or do not grow as anticipated.
6. For certain components, assembled products and supplies, ALOT is dependent upon single or limited source suppliers.

Catalyst

See above.