Sunday, May 6, 2018

A current AIM Program Small Cap Equity Holding: Astronics Corporation Class B (ATROB) by: Alec Jensen. "Flying to Success"


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Astronics Corporation Class B (ATROB, $40.57): “Flying to Success”
By: Alec Jensen, AIM student at Marquette University
Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary

Astronics Corporation Class B (Pink OTC Markets: ATROB) supplies products to the aerospace, defense, electronics, and semiconductor industries. Astronics Corp. has two business segments: Aerospace (84% of revenue) and Test Systems (16% of revenue).

• Astronics Corp. recently updated their 2018 revenue guidance and its looks promising.

• Management is proactive in positioning themselves for future success in next-generation aircrafts.

• The company plans to see higher and more representative sales volumes which will help with their declining margins.

• They have seen an increase in their bookings and were chosen by multiple major airlines to have their products placed inside the aircrafts.

Key points:

Astronics Corporation has situated themselves nicely for the future despite some obvious issues that have plagued the company. Being a supplier for the airline industry, the company faces heavy competition and has a small customer base who make up a large portion of their revenue. Notably, about 50% of their revenue comes from their five biggest customers. In the event of losing a customer or having the rate of new aircrafts/aircraft upgrades decrease, this could prove troublesome for the company. Also, due to the advancement of technology, this forces Astronics to be progressive in the development of new technology to stay competitive.

Fortunately for Astronics Corporation, these risks have not resulted in a large setback. This is in part due to the company’s ability to innovate and make products that keep up with customer’s needs. For example, Astronics doubled their R&D expenses from around $45 million to $90 million over the past few years. They have launched new lighting system products as well as an aircraft antenna system. In addition to innovation within the company, they have made two key acquisitions this past year. The Custom Control Concepts LLC and Telefonix, Inc. acquisitions help them break further into the cabin management market and provide a better product mix.

Looking at what is expected for 2018, Astronics stated that in Q4 2017 they received orders of $229 million. This is promising for 2018 sales, which have just been updated by management to have a midpoint of $780 million. The midpoint sales number for 2017 is expected to be around $630 million. Therefore, the company is expecting to see nice sales growth in the coming year. Astronics also aligned their research and development of new products with the future of aircrafts and have made deals with six major airlines. These deals bode well for the company’s growth from next generation aircrafts and their inputs.

What has the stock done lately?

On news from management about their updated 2018 guidance, the stock saw a 15% appreciation as a result. While this appreciation may raise questions regarding if the stock is fairly valued, ATROB is still 9 dollars under its 52-week high. With increased expected sales numbers and great bookings, Astronics shares will likely be priced higher in the coming months. 

Past Year Performance: Astronics has experienced an increase of 22.20% in the stock price over the past year. The stock still performed even with a lower than expected sales number (down 5% from Q3 2016) in 2017 and a decreasing operating margin to 10%. These lower margins they experienced were rationalized by management to be from the sales drop in their semi-conductor business, which normally helps margins.


Source: FactSet

My Takeaway

While Astronics Corporation hasn’t had the most ideal year for a risk-averse investor, the stock has still performed and management is continuing to move the company in the right direction. They have made innovative products and strategic acquisitions that will prove well for them in the future. Not to mention, the company just pumped up the hopes of investors and excited them with their updated guidance for 2018. With the combination of future growth and awareness/addressing of the company’s risks, I recommend that Astronics continue to be held in the AIM portfolio.

Source: FactSet



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