Atai Capital: AstroNova Inc. ($ALOT) Investment Case – Q2 2024
Atai Capital provides an update on AstroNova Inc. ($ALOT), their largest position since the fund’s launch. Despite AstroNova’s lackluster stock performance, Atai remains highly confident in the company’s potential. Their conviction is based on ALOT’s significant EBITDA growth, attractive valuation, and promising future prospects. Atai views the recent stock price decline as a disconnect between the company’s business performance and market perception, presenting a compelling investment opportunity.
Investment Highlight: AstroNova Inc. (ALOT)
Business Overview
- Operates in two segments: test and measurement, and product identification
- Recently acquired MTEX, a Portugal-based label, packaging, and printing solutions manufacturer for ~$26M
Market Position
- Experienced a ~20% stock price decline following Q2 results
- Consolidated revenue declined ~7% year-over-year, with both segments showing declines
Performance Analysis
- One-time Issues Affecting Q2 Results:
- Test and measurement business faced shipment delays from a supplier
- Slow ramp in narrow-body aircraft production
- $4.5 million order in product identification pushed to next quarter
- Underlying Business Strength:
- Product identification segment saw 290bps operating margin expansion despite revenue decline
- Company reiterated guidance for mid-single-digit organic growth and 13%-14% EBITDA margins
- Expects 100bps of margin expansion in each of the next two years
Growth Runway
- MTEX acquisition expands product lines to large format printing, direct-to-fabric printing, and direct-to-film printing
- MTEX potentially has 20%+ EBITDA margins and has been growing revenue at a healthy double-digit rate
- AstroNova may utilize MTEX’s printhead, ink, and delivery systems in new and updated product offerings
Market Dynamics and Opportunities
- EBITDA has grown from $8M at time of Atai’s purchase to $17M in the most recent quarter
- Expected normalization of Aerospace segment
- Numerous cost-saving initiatives in place
Valuation and Expected Returns
- Trading at less than 5.0x EBITDA and 6.0x UFCF before incremental cash generation
- Atai expects AstroNova to reach $30M+ of EBITDA in 2026
- Projecting continued mid-single-digit topline growth with faster bottom-line growth
Other Key Points
- Stock price performance has been lackluster despite more than doubling EBITDA in less than two years
- Atai believes the current valuation is “incredibly undemanding” given growth prospects
- MTEX acquisition could prove highly accretive with numerous quantitative and qualitative benefits
Atai Capital maintains its strong conviction in AstroNova, viewing the current market valuation as a significant opportunity given the company’s robust EBITDA growth, margin expansion potential, and strategic acquisitions. They see the stock’s underperformance as temporary and expect the market to eventually recognize the company’s improving fundamentals.
Click here for the full pro investor letter.
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