Allied Motion Technologies: Close, But Not Quite Yet (NASDAQ: AMOT)

Stock Market


Trading Charts on a Display

da-kuk / E + via Getty Images

It’s been about 14 months since I put out my “avoid” piece on Allied Motion Technologies Inc. (AMOT), and at that time the shares have declined by about 12.5% ​​against a gain of ~ 13.8% for the S&P 500. I thought I’d look at the stock for a couple of reasons. First, and obviously, most importantly, this relative performance offers the opportunity to brag, and I never pass that up. Second, a stock trading at $ 30.50 is, by definition, a more compelling prospective investment than that same stock when it was trading at $ 35. Finally, the company did three significant deals in 2021, and so in many ways, it’s now a different company, or soon will be. I’ll determine whether or not it makes sense to buy at current prices by looking at the updated financial history here, and by looking at the stock as a thing distinct from the underlying business. Finally, as the song says, “I gotta be me”, and so I’ll be recommending a specific short put trade.

Welcome to the “thesis statement paragraph.” As my regulars know, this is where I give you a pithy summary of my argument in a manner that may save you time, and, more importantly, save you from being exposed to too much “Doyle mojo.” You’re welcome. Not all heroes wear capes. Anyway, in case you managed to open this article while remaining unaware of the title, or in case you slipped past the bullet points above without noticing them, this paragraph is for you. I think Allied Motion’s a fine business, that had great results in 2021, and I think the three acquisitions over the past year will improve the bottom line even further. The problem, as is frequently the case, is the valuation. I (still) can not pull the trigger on this stock. Just because I do not see value at the current price, though, does not mean I think this investment is “value free.” I would love to buy this stock at $ 25, and, thankfully the options market offers a decent premium for a $ 25 strike price. Specifically, I would recommend selling the October put with a strike of $ 25. That’s the summary in a nutshell. Now that you have it, you can leave and decide whether or not to take the advice. If you choose to delve deeper into this article, all I can say is “abandon all hope, ye who go in by me.”

Financial Snapshot

Since I last looked at this business, the financial returns have been quite good in my estimation. For example, sales were up about 10%, and net income was up by a massive 76%. This uptick in income happened in spite of double-digit increases in selling, and G&A. Apart from an increase in revenue, gross profit, the profit in 2021 was aided by a swing from a $ 5 million income tax provision to a $ 980 thousand income tax benefit in 2021. In case you’re worried that 2021 looks artificially rosy because 2020 was so bad, fret no longer, dear readers. The performance in 2021 was also far better than it was in 2019. Specifically, in 2021, revenue was 8.75% higher than it was in 2019, and net income was up by all of 42%.

Nothing’s perfect, though, and Allied Motion is no exception. The capital structure has deteriorated fairly dramatically, with long-term debt up about 32% from the year-ago period, and cash down by about 3%.

The Acquisitions

The acquisitions happened late enough in the year that they did not have a material impact in my view. Specifically, the Spectrum acquisition was announced at the end of the year. The ORMEC acquisition was announced on November 2, and the ALIO Industries acquisition was announced two days later.

Although the acquisitions did not impact 2021, I think they have the potential to improve profitability in 2022. Specifically, ORMEC is expected to improve the Industrial and A&D categories, and ALIO will impact Medical and Industrial.

Given the great performance in 2021, and given some of the potential drivers of future growth, I’d be happy to buy this stock at the right price.

A financial history of Allied Motion Technologies from 2014 to the present.

Allied Motion Technologies Financial History (Allied Motion Technologies Investor Relations)

The Stock

The masochists who follow me regularly for some reason know what time it is. It’s time to play the “let’s disqualify an otherwise reasonable investment because the price is too high” game. We’ve come to the point in the article where I start yammering about the strong negative relationship between price paid and subsequent returns. This truism seems to bother some people, and it also seems to bother some people when I point out that we do not actually buy “companies.” We buy these supposed proxies for companies called “stocks”, and the latter’s price performance is governed more by the mood of the crowd than they are by what happens at the company that they supposedly represent. I’m of the view that the price changes are much more about future expectations, and the whims of the crowd than anything to do with the business. This is why I look at stocks as things apart from the underlying business. I’ll use Allied Motion stock itself to demonstrate the point. The company released full year results on March 9. If you bought this stock the next day, you’re down about 8% since. If you waited five days, you’re up about 2.2%. Obviously, not much changed at the firm over this short span of time to warrant a 10% + swing in returns. The investors who bought virtually identical shares more cheaply did better than those who bought the shares at a higher price. This is why I try to avoid overpaying for stocks.

If you’re a regular, you know that I measure the cheapness (or not) of a stock in a few ways, ranging from the simple to the more complex. On the simple side, I look at the price ratio to some measure of economic value like sales, earnings, free cash flow, and the like. Ideally, I want to see a stock trading at a discount to both its own history and the overall market. In my previous missive on this name, I decided to eschew the shares because they were trading at a PE of just under 35 times. This was too optimistic in my view and was very near a multi-year high valuation. As the stock price collapsed, and the earnings increased, the shares are now about 47% cheaper per the following:

Chart
Data by YCharts

My regular victims know that in addition to simple ratios, I want to try to understand what the market is currently “assuming” about the future of this company. In order to do this, I turn to the work of Professor Stephen Penman and his book “Accounting for Value.” In this book, Penman walks investors through how they can apply the magic of high school algebra to a standard finance formula in order to work out what the market is “thinking” about a given company’s future growth. This involves isolating the “g” (growth) variable in a fairly standard finance formula. Applying this approach to Allied Motion at the moment suggests the market is assuming that this company will grow at a rate of ~ 5.5% in perpetuity. I consider this to be a pretty optimistic forecast, in spite of all the new drivers, and for that reason, I’ll continue to eschew the shares.

Options As An Alternative

Just because I do not want to buy the stock does not mean there’s nothing to be done here. Specifically, though the stock may be overpriced, it’s possible to earn a decent return by selling put options at a price that I’d be willing to pay. I think this is a “win-win” in this instance because if the shares remain above the strike, I’ll simply pocket the premium and drive on. If the shares fall in price, I’ll be obliged to buy, but will do so at a price that makes sense to me. When you “win” no matter the outcome, you can describe the trade as a “win-win.”

In terms of specifics, I’m recommending selling the October puts with a strike of $ 25. These are currently bid at $ 1.25. I consider this sale to be a “win-win”, obviously, because I’m comfortable with either outcome. If the shares remain above $ 25 for the next seven months, I’ll simply add the premium received to the whiskey acquisition fund. If the shares fall another 18% from current levels, I’ll be obliged to buy, but will do so at a price that lines up with a PE of ~ 14. That valuation correlates nicely with future decent returns on the stock. So, I consider this to be a very good trade given the relatively low risk.

It’s time to spoil the mood by writing about the risk of short put options, dear readers. I characterize them as “win-win”, but you might be forgiven for suggesting that’s a bit of hyperbole. The fact is that short put options, like everything in life, come with risk. The short puts that I consider to be ‘win-win “are a subset of all short puts. I consider a short put to be a” win-win “when it’s written on a company that I would be happy to own at a price at which I’d be happy to buy. So, not all puts are “win-win” trades. If the strike price is a terrible entry price, for instance, that’s a very bad trade in my view.

I should also state that I think the risks of put options are very similar to those associated with a long stock position. If the shares drop in price, the stockholder loses money, and the short put writer may be obliged to buy the stock. Thus, both long stock and short put investors typically want to see higher stock prices.

Some put writers do not want to actually buy the stock – they simply want to collect premiums. Such investors care more about maximizing their income and will be less discriminating about which stock they sell puts on. To be very clear, I am not such an investor. I like my sleep far too much to sell puts based only on the income I can generate. I’m so much of a coward that I’m only willing to sell puts on companies I’m willing to buy at prices I’m willing to pay. I was not always so disciplined, but after painful losses, I decided to only ever sell puts on quality companies at prices I was willing to pay.

I should also write that I think put writers take on risk, but they take on less risk (sometimes significantly less risk) than stock buyers in a critical way. Short put writers generate income simply for taking on the obligation to buy a business that they like at a price that they find attractive. This circumstance is objectively better than simply taking the prevailing market price. This is why I consider the risks of selling out of the money puts on a given day to be far lower than the risks associated with simply buying the stock on that day.

I’ll conclude this rather long, drawn out, ponderous discussion of risks by looking again at the specifics of the trade I’m recommending. If Allied Motion shares remain above $ 25 over the next several months, I’ll simply add the premium to the whiskey acquisition fund and move on. If the shares fall in price, I’ll be obliged to buy, but will do so at a price that lines up with a very nice subsequent return. All outcomes are very acceptable in my view, so I consider this trade to be the definition of “risk reducing.” You may think me odd for ending a section on risk with a description of how these specific put options reduce risk. I’ll remind you that I never promised to remain sane all the way to the end of the article.

Conclusion

I like Allied Motion a great deal. Apart from the deterioration of the capital structure, the company performed very well financially. In addition, the company has gone on a deal binge, and I suspect those will improve the bottom line even further. The problem, as is frequently the case, is the valuation. The shares are priced too richly still, and so for that reason, I can not recommend buying. That said, I’m very comfortable buying into this business at $ 25, so I recommend selling the puts described above. If you’re not comfortable with options, I’d recommend holding off a little longer before buying. If you’re comfortable with options, I’d recommend this short put or a similar trade.



Source link

Leave a Reply

Your email address will not be published.