Why Alstom Is A Long-Term And A Timeless Investment (OTCMKTS:ALSMY)

Dear readers/followers,

In my initial article on Alstom (OTCPK:ALSMY), I made it clear that I see the company as a play with a 20-40% upside. The fact is if you bought the company in line with my first article after a truly massive drop…

…you would have done very well for yourself – as my position did, with an RoR of market-beating ~22%, over 30% above the S&P500 in the same time. The returns from the second article were negative, but it doesn’t faze me with regard to the company’s fundamental qualities – which are superb.

In this article, I mean to revisit Alstom with you – and let you know why I’m still buying this French giant.

Alstom – Revisiting the company

Recall Alstom? This is a company that you want to own, as I see it, because it works in the fields of transportation, signaling, and locomotives, and it does its job well. I know that the availability of anything but commercial transportation of goods on railways is outside of the norm in the USA and all of NA, but that is not the case in the global context.

Here in Europe, large parts of passenger traffic and transportation are found on railroads as well – and in emerging economies, railways are key. If you spend any amount of time in Europe – or elsewhere on the planet – you’ll quickly notice that US is in the minority when it comes to its lack of developed passenger railroad infrastructure.

That means that if you mean to invest internationally, you need to have your eyes open and ear to the ground when it comes to international railway stocks – and that includes the manufacturers and enabler of these technologies.

Alstom is a key global enabler of such technologies.

With the exception of a Chinese competitor, Alstom is the largest company on the planet in this field – by far.

And that should interest you – because a company with a track record of building the AGV, the TGV, the Eurostar, and many other key modern and historical high-speed trains and technologies, including things like metro, suburban, regional and trams, is a good play to at least consider – as long as the company is well-managed.

Alstom was even part of giant General Electric (GE) for some time, all the way until 1989. After that, it grew through inorganic growth by buying up European signaling and rolling stock manufacturing companies. There is a dearth of companies that manufacture rolling stock not only in Europe but in large parts of the world, which has seen the availability of things like passenger wagons/sleepers for trains having production times of 5-6 years due to backlog and demand. This is one of the factors that recently forced Swedish SJ to spend hundreds of millions of SEK to refurbish existing, sub-par stock because they cannot get their orders of new products. (Source) (Source 2)

That isn’t to say Alstom is without its fundamental issues. The company required a bailout back in -03 after the dot-com bubble, and the company has really, over time, been a very negative investment.

The buyout forced the company to divest several divisions. Alstom used to build ships. This is the reason they no longer do. Alstom used to develop electrical transmissions – this one they were able to re-acquire back in 2010, but it’s been in rocky straits not once, but several times – in 2004 again. The company used to be in transmission/power grids as well, and it no longer is.

Essentially, Alstom used to be French Siemens (OTCPK:SIEGY), but unlike Siemens, they failed to adapt and move into a profitable sort of flow in the early 2000s – so today we have strictly the railway and rolling stock components left in play.

Their M&A of Bombardier Transportation is one of the key drivers of future long-term value for the company. They have already set new fiscal targets, and there is progress toward these.

Recent results more or less confirm good progress towards this upside.

The top-line of the company is intact. Alstom is seeing good order intake, with a 1.25x book to bill, and a backlog of €81B, which is on par with some defense contractors. Sales are up 11% for the full fiscal of 2022, which ended some months ago, with strong market demand confirmed for the presentation of the results back in November. Book-to-bill remains at 1.25x, with further sales growth and an EBIT margin growth of 40 bps to just south of 5%, despite the ongoing cost and inflation pressures. FCF is still negative, but only by €45M, compared to nearly €1.5B in negative FCF for the 1H21/22 period.

Alstom has confirmed the ongoing market demand and backlog potential for 2025-2026E, and it’s looking absolutely superb.

With this more or less confirmed, what I want to see is that the company can exercise cost control and actually squeeze a decent profit out of those contracts. Because we’ve confirmed that Alstom can indeed win contracts, and do so impressively across Europe, while at the same time growing its service portfolio.

Sales execution and the supposed margin on the relevant contract is on track. The company still has a backlog of non-performing sales that traded at a margin of essentially zero due to the contracts – and the company has been weighed down by the provisioning of these contracts – but Alstom is settling where possible, and the current provisions and execution for those sales is going as expected with less than 20% of recent sales at such margins.

The company expects operational performance recovery in full by March of 2023 in the context of current challenges, and for these non-performers to be done by late next year, or thereabout.

The company is also at the forefront of new tech – which includes Hydrogen usage for trains.

So, my case for Alstom is as follows. The foundational thesis for Alstom or any rolling stock/railroad company is a positive one, given the global transportation trends, where railways are a necessity and part of the future. What remains then is making sure that the company is solidly managed and can not only be a good railway company, but also a good investment. As we know, good investments and “attractive” businesses are sometimes very different, and Alstom has a very chaotic past.

Things are looking better though. Alstom’s P&Ls are looking better and better every quarterly. Both top-line and bottom-line results are showing significant improvements despite ongoing margin and inflation pressures. Alstom is not only managing them but excelling, outperforming with 18.5% EBIT growth and a 40 bps margin expansion. Synergies and volume/mix are the key drivers here. Once the non-performing sales are out of the mix, and once inflation and macro cool off a bit, I wouldn’t be surprised to see margin improvements on the order of 150-200 bps for Alstom.

The company is clear about the challenges it sees, and how they weigh things down.

The reason for the negative FCF is significant WC consumption, which also isn’t expected to be at the same level going forward – which means that the near-zero FCF was actually a very impressive overall result. The company expected it negative for now, and it’s down about 1% (before provisions) as a percentage of sales. Provisions include risks on contracts.

The company has a stable financial situation, coming in at €4.6B in liquidity including nearly €850M in cash and billions in revolvers and short-term facilities. The company lacks covenants on any of its debts and has average maturities of nearly 6 years with an average coupon of 0.22%. I give you the challenge of finding that coupon in another company, and the fact that nothing is due until the end of 2026.

The company expects FCF to cycle positive in the next quarter, and has confirmed the outlook.

Alstom is a fundamentally solid company with a good future. It’s a long-term play for me – and here’s the current valuation for the company.

Alstom’s valuation

As I said in my first article, Alstom valuation has some problems, because the company does not share segment-specific margin or breakdown data. This is a problem for almost any sort of deeper valuation model because we have to guesstimate a lot.

I still believe it is fair to say, based on the Backlog and current management guidance that we can forecast, on a DCF basis, for Alstom to grow faster than the global industry average – despite the current macro.

The wider industrial reach, better footprint, and more diverse offerings will likely result in this. I expect considerable continued margin pressure until after 2022 relating to Bombardier Transport, but not after 2023, after which I model for a margin increase. This is based on a focus on execution, digitalization, and almost half a billion euros of deal synergies. And this is for the fiscals, not calendar years because Alstom has a different fiscal than the calendar.

Along with this, I guide for a 4-5% EBITDA and sales growth, with a top-end 5.5% EBITDA growth range, down 0.3% from 5.8% and an increase in CapEx to 5.5%, (up from 5%) starting to wind down in 2023-2025. The company has a WACC of around ~8.5% with a cost of debt of around 2.45%, with the cost of debt static due to the very low interest rates for the company’s actual debt.

These forecasts mean that I still get a conservative DCF target for the business of €33.5 on the low side, all the way up to €37 on the high for the native ticker.

NAV and peer-average multiples are far harder. Because we cannot use historicals and we don’t really know sector-specific margins, valuing the sum of the parts for Alstom becomes straight guesswork.

We could use sector-average EV/EBIT multiples to value these and say that Alstom has generally been doing well, but that might miss some of the segment-specific nuances. I prefer using a slight discount here and would value nothing at an EV/EBITDA above 15X, despite analyst peers sometimes going as high as 16-17 (Services and Signaling, due to the margin assumptions for these segments).

Therefore, discounts here come to an after-discount NAV of around €14B, which one a share basis is closer to €37/share, close to DCF high-end. S&P Global averages come in far lower – in a year they’ve gone from €45/share down to just €30/share, with a range of €14 to €38. I view this change as absolutely nonsensical and too short-term to be of value.

I, therefore, choose to not change my PTs for Alstom here, nor discount the company heavier than I have. My previous target for the company was €36/share, and I’m sticking to it.

I see massive upside potential for Alstom, and I’m not alone. 14 out of 19 analysts, despite these price targets, rate the company as a “Buy” or “outperform”, implying high attractiveness, despite a €23/share native price for a share of the company with the ALO ticker.

Here is my thesis for Alstom.

Thesis for Alstom’s common shares

• Based on long-term positive business fundamentals from a combined rolling stock/service/turnkey business and added to by urbanization in the emerging markets, the future trends for Alstom are likely to be positive. Pushes for green services and marketing are likely to enhance this even further.
• The company’s focus on improving portfolio margins and moving to higher-margin segments such as signals/services is likely to benefit the company in the long term.
• I view the company as a “Buy” with a PT of €36/share.

Here are my criteria and how the company fulfills them (italicized)

• This company is overall qualitative.
• This company is fundamentally safe/conservative & well-run.
• This company pays a well-covered dividend.
• This company is currently cheap.
• This company has a realistic upside based on earnings growth or multiple expansion/reversion.

The company fulfills every single one of my requirements, and therefore warrants a “Buy”.

The options play for Alstom

Alstom is a potentially attractive options play because of a combination of factors. The company’s share price dictates that a contract’s capital exposure won’t be that high even for most investors, and the volatility suggests that there can be an advantage to putting oneself in the position of writing Puts. I wouldn’t do calls on Alstom due to the upside and the price here, but Puts is a different matter.

This is a double-digit percentage change put with an 83 day timeframe. I’m working with market-closed options chain data here from IB, which means that the premiums might, or likely will shift a few cents once the markets open. But if you can get the €20 strikes at above €0.5 per share, you’re netting a double-digit annualized yield for a capital outlay of less than €2,000, which also happens to be over 8x the dividend payout of the company.

This is an attractive put to my mind.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.