Astronics: Beneficial Guidance As Aeronautical Demand Picks Up

Aeronautical player Astronics Corporation (NASDAQ:ATRO) delivered beneficial guidance for Q4 2022, and management appears quite active for acquiring networks of radio fabrics and Wi-Fi networks. The company also has expertise in working for massive corporations and the U.S. Department of Transportation, and many of its activities are well-diversified. In sum, even considering some risks out there, I believe that future free cash flow could justify higher stock price marks.

Astronics Overview

“Innovation at 30,000 feet begins with a conversation at 6 feet” is the head statement of Astronics Inc, a company dedicated to the development and production of elements for aviation. Astronics currently has around 2,100 employees, of which only 400 are not based in the United States.

Through its different brands, the company has managed to position itself in the market as a provider of technical support and technological improvement to its customers. The most prominent business segments of the company include the area of ​​energy and mobility, connectivity and data, lighting and security, test solutions, interiors, and structural services.

Its most frequent clients are in the aeronautical industry, both for commercial flights and private flights, and the provision of technology and technical development for defense aircraft. It also has contacts with the area of ​​medicine and space satellites, demonstrating the diversification of its capabilities and products. I believe that investors will likely appreciate that management is really working to diversify its activities.

Since its creation 55 years ago, Astronics has managed to obtain a client portfolio made up of more than 500 companies through its subsidiaries, each specialized in different segments of its business. Hence, with a long list of clients, I wouldn’t be expecting that amount of revenue volatility in the near future.

Balance Sheet

As of October 1, 2022, the company reported accounts receivables worth $133 million, inventories of $190.198 million, and total current assets of $347.337 million. Current liabilities are close to one-third of the total amount of current assets, so I don’t see a liquidity issue on this name.

Property was worth $90.640 million with intangible assets of $82.814 million, goodwill of $58.143 million, and total assets worth $598.887 million. The asset/liability ratio exceeds 1x, so I would say that the balance sheet is stable.

The liabilities include accounts payable of $53.216 million, accrued expenses close to $46.253 million, and customer advance payments of $29.048 million. Total current liabilities stand at only $133.488 million. Besides, Astronics also reports long-term debt of $159 million, with other liabilities worth $58.345 million and total liabilities worth $361.799 million. Considering that analysts are expecting 2024 EBITDA close to $68 million, I don’t believe that the long-term debt is that worrying.

Management Has Beneficial Expectations, And Investment Analysts Are Expecting 2024 Sales Growth Of 17%

In the last quarterly report, Astronics reported impressive expectations that include double-digit sales growth in Q4 2022 thanks to demand for the company’s products, and Astronics’ position in the industry. I believe that investors will likely appreciate the following words from the last quarterly report.

As previously reported, we are expecting sales of $140 million to $150 million in the fourth quarter of 2022, an increase of 10%, or $14 million, at the midpoint over the trailing third quarter. This would result in estimated 2022 sales to be up approximately 17% from last year’s revenue of $445 million. While disappointed with the lower sales level for the year than we had previously anticipated, we remain very encouraged with the demand for our products, our position in the industry and the significant opportunities in which we are engaged. Source: 10-Q

Investment analysts are expecting significant sales growth in 2023 and 2024 as well as growing EBITDA margin. 2024 net sales are expected to be close to $725 million, presenting a growth of 17.31%. 2024 EBITDA could be close to $68.5 million with an EBITDA margin of 9.45%. In addition, 2024 operating profit could stand at close to $29.4 million together with an operating margin of 4.06%.

Regarding the pre-tax profit, estimates include $15.2 million, with 2024 net income of $11.4 million and an EPS of $0.35. I used some numbers for financial models, which included a median sales growth close to 17% and an EBITDA margin of approximately 5%.

Free cash flow (“FCF”) expectations include 2023 FCF of $20.1 million and an FCF margin of 3.25%. Considering the previous FCF margin close to 5% in 2020 and 3% in 2019, I believe that assuming an FCF margin of 3% in the future would make sense.

Base Case Scenario: My DCF Model Implied A Valuation Of $17 Per Share

I am quite optimistic about the agreements reported with the U.S. Department of Transportation in 2021. Let’s note that Astronics received payments related to these agreements in 2022. I believe that Astronics may receive further contracts from other governmental agencies in the United States and perhaps abroad. New long-term contracts will likely bring recurrent revenue, and may enhance the company’s valuation.

In September 2021 the Company also entered into an agreement with the U.S. Department of Transportation under the Aviation Manufacturing Jobs Protection Program for a grant of up to $14.7 million. The Company received $7.4 million under the grant in 2021, $5.2 million in the first quarter of 2022 and $2.1 million in the third quarter of 2022. The grant benefit was recognized over the six-month performance period as a reduction to cost of products sold in proportion to the compensation expense that the award is intended to defray. The Company recognized the remaining $6.0 million of the award during the nine months ended October 1, 2022. Source: 10-Q

Astronics noted in the last annual report that it intends to create value through the development of technologies and capabilities, either through internal research or through the acquisition of smaller companies, with the ultimate goal of using these technical and productive capabilities in innovation, solutions service for aircraft or government defense areas as well as other markets where their technologies can be beneficial. Under this case scenario, I assumed that research and developments and acquisitions would be successful.

I could identify beneficial transactions executed in the past, so Astronics has expertise in the M&A markets. Astronics purchased Freedom Communication Technologies, thus acquiring a large network of radio fabrics and Wi-Fi networks, primarily intended to improve its technical diagnostic testing segment. Astronics also acquired Diagnosis, a company with similar purposes to Freedom, thus demonstrating its particular interest in the growth of this area of its business model.

With successful new transactions and R&D, my estimates include 2027 net sales of $1.193 billion, together with a net sales growth of 18.17%, an EBITDA of $73 million, and an EBITDA margin of 6.09%. 2027 FCF would be $36 million accompanied by an FCF margin of 3.05%.

With an EV/EBITDA multiple of 14x and a WACC of 9.7%, I obtained an enterprise value of $688 million accompanied by an equity value of $532 million. The internal rate of return would stand at 8.41%, and the fair price would stand at $17 per share.

Risks Could Imply A Valuation Of $7.5 Per Share

The most prominent clients, with whom the company has historically maintained a commercial relationship, are Panasonic (OTCPK:PCRFY) and Boeing (BA). This, on the one hand, shows a certain fragility in the diversification of the clients of the company, since it depends at the same time on the demand and growth of these two companies. However, on the other hand, it shows the quality and professionalism of Astronics, which has maintained commercial relations for years with important corporations and leaders in their field.

We have historically had a significant concentration of business with two major customers, Panasonic Avionics Corporation and The Boeing Company. While sales to Panasonic accounted for less than 10% of sales in 2021, they accounted for 11.1% of sales in 2020, and 13.0% of sales in 2019. Sales to Boeing accounted for 10.0% of sales in 2021, 9.5% of sales in 2020, and 13.6% of sales in 2019. Source: 10-K

In any case, Astronics has suffered a lot from the COVID-19 pandemic and the great restrictions in the aeronautical market, both for private flights and commercial flights, without evidencing great losses or damages. Although, in the same way, the pandemic is considered closed and overcome, the appearance of a new variant or a similar type of disease could again mean a moment of recession in the earnings of Astronics, leaving it in a situation of risk and with no immediate possibility to reverse this situation or invest its capital in other types of markets.

Lower cost of labor in competing companies means a risk in the development and growth of the company. Besides, a change of government in the United States in the next presidential elections could be risky, since Astronics’s trade contracts with the military defense area of ​​this country are subject to the policies implemented by the incoming government.

By assuming 2027 net sales of $1.103 billion and sales growth of 15%, I obtained an EBITDA of $69 million with an EBITDA margin of 6.25%. 2027 FCF would stand at $34 million, together with an FCF margin of 3.05%.

With an exit multiple of 10.5x and a discount of 15%, I obtained an implied enterprise value of $398 million. Besides, with cash of $2.5 million and debt of $159 million, equity would be $242 million. Finally, the results would include an IRR of -5.47% and a fair price of $7.5 per share.

Conclusion

Astronics Corporation delivered an impressive guidance for Q4 2022, and many analysts are expecting beneficial results for the next two years. I believe that further research and development and more acquisitions of companies running Wi-Fi networks will likely bring FCF growth. Besides, if management can sign new long-term agreements with governmental agencies in the U.S., stock demand will likely increase. I do see risks from new restrictions in the aeronautical market, or lower activity from Panasonic or Boeing. With that, I believe that Astronics Corporation could be worth much more than what the market is indicating right now.

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