Astronics Stock: Flying Low (NASDAQ:ATRO)

Shares of Astronics (NASDAQ:NASDAQ:ATRO) simply cannot seem to get a break, having fallen to the post pandemic lows again. In January 2021, I concluded that the company and its shares were facing heavy turbulence, as a former growth darling has seen real disappointing performance which started already ahead of the outbreak of the pandemic. With uncertainty and leverage being high and organic growth being lackluster, the situation was very uncertain, but not yet hopeless.

A Look Back

Astronics has long been a nice roll-up growth story. Just a $150 million aerospace business in the year 2007, the company grew sales to $700 million in 2015. Sales grew more than 5 times in less than a decade, albeit that quite a bit of this growth was financed by dilution, with the share count up some two thirds over the same period of time. This growth was recognized by the markets with its shares trading in the single digits in 2007, only to hit a high at $50 in 2015.

The issue is that sales have been consolidating since 2015 causing shares to be quite stagnant around the $30 mark, albeit with some volatility.

As it turned for the year 2019, sales fell a bit to $773 million, after some growth was still seen in the years before. The issue is that earnings power, which peaked at $2-3 per share in the years before, fell to $1.60 per share, even aided by gains on the sale of the semiconductor test level system.

Excluding this one-time gain, operating profits fell from a mere $63 million to just a $1 million number, a dismal result even if we factor in some impairment charges. Early in 2020, the 31 million shares traded at $30, for a $930 million equity valuation, or $1.1 billion enterprise value at 1.5 times sales. This was a low multiple for a diversified aerospace supplier, yet margins were the issue.

Covid-19

Following the pandemic, shares obviously saw tough times given the nature of the business as shares had fallen to the single digits in 2020 and traded at $12 at the start of 2021. This resulted in just a $380 million equity valuation, or just over $500 million valuation if we factor in net debt. Sales multiples fell to 1 times sales and thereby effectively collapsed.

Full year 2020 sales fell to $502 million with the fourth quarter run rate worse than that. The company posted a full year operating loss of $100 million, yet fourth quarter operating losses of $5 million on $115 million sales marked quite some improvements, as some of the annual losses were driven by one-time charges as well. The only bright news is that the company believes that 2021 sales could exceed $500 million, indicating that a sequential increase in sales was seen, of course heavily depending on the pandemic unfolding.

I believed that the immediate risk was a $130 million net debt load with the business not economical at the time, and uncertainty high on the developments surrounding the pandemic. Under normal conditions a $700 million revenue number and 10% margin number should be achievable which should work down to $50 million in earnings power, or about $1.50 per share. Once realised, valuations might improve to $30, yet I understood the cautious stance of investors at the time given the risks related to execution and the development surrounding the pandemic.

What Happened?

Since urging a mixed stance at $12 in 2021, shares rallied to a high of $19 in the summer of 2021, yet ever since shares have gradually come down to just $8 and change here. Forwarding a year, Astronics posted full year sales at $445 million, down 11% on the year before with operating losses reported at $29 million, with the business hit by Boeing’s (BA) woes, among others. With net debt stable at $133 million, the leverage situation is somewhat stable, yet the 2021 performance has been very soft, far softer than initially guided for.

Despite the softer year, the company initiated an ambitious 2022 guidance with sales seen between $550 and $600 million, with 60% of the anticipated revenues seen in the second half of the year. The company cut the higher end of the guidance to $550-$580 million following the second quarter earnings report. With sales posted at $245 million in the first half of the year it was disappointing to see an operating loss of $12 million over this same period of time, with losses larger in the second quarter as well, all while net debt was flattish around $126 million.

With modest dilution increasing the share count to 32 million shares, these shares now represent an equity valuation of just $256 million, or $380 million enterprise valuation, at less than 1 times sales. As revenues are comfortably surpassing half a billion mark here, the sales multiples are very modest, yet the issue is of course that the business is not profitable by all means, despite a modest recovery in sales in the first half of the year.

And Now?

Amidst all these moving targets, which includes a better sales performance this year, albeit accompanied by lackluster margins, as the business trades well below 1 times sales on an enterprise value basis here.

To ignite momentum, profitability really has to come back, and the company is still about 5% away from breaking-even, let alone to produce any meaningful profits in the near term. Given all of this, I am still leaning a bit cautious from the fundamental point of view, yet if any margin improvement can be demonstrated on, which is implicitly baked into the second half of the year guidance, we might see real opportunities.

After all, the lower end of the guidance for the year implies at least $150 million in quarterly sales in the next two quarters which should leave room for profitability, although this has not been quantified. Amidst all of this, a small speculative position is warranted, although a speculative position, as the company has lost a lot of credibility with investors.