Second-quarter earnings results show forestry, commercial, and agricultural vehicle maker Alamo Group (NYSE:ALG) revved up its performance this spring and early summer as the economy started shaking off the effects of COVID-19 lockdowns. Alamo saw orders slump in 2020 due to the impact of the pandemic, among other reasons.
Some trends created by last year’s temporary lockdowns may even be giving Alamo a further lift, though other factors are interfering with its growth. There are at least two points investors should consider before deciding whether or not to add Alamo Group to their portfolios.
1. Alamo is rebounding and showing signs of longer-term growth
Unsurprisingly, Alamo Group’s second-quarter report revealed a strong rebound from the COVID-19-crimped prior-year period, with revenue and net income “significantly improved.” In addition, Alamo Group’s acquisitions of Morbark and other small companies several years ago are helping catalyze growth now.
Year over year, quarterly revenue jumped by 29% to $347.6 million, while adjusted earnings per share surged by 73% to $1.97. These metrics also grew compared to Q2 2019, by 21.9% and 12.6%, respectively. Significantly, the company has also paid down much of the long-term debt it was forced to take on earlier in the COVID-19 pandemic. Its long-term debt at the end of Q2 2019 was $166.2 million — by the end of Q2 2020, that figure had exploded to $423.7 million. Now, it’s hovering around $299 million — still significantly above 2019’s figure, but the deleveraging continues, and the company also has $85.6 million in cash on hand.
Unlike some companies, Alamo Group continued paying its dividend throughout 2020. It also increased the quarterly per-share payout from $0.13 to $0.14 at the start of this year.
Revenue and earnings growth are likely to persist as orders have continued to pour in, leading to an all-time record backlog in orders. “During the quarter, we saw continued strong customer demand across the entire range of our industrial and agricultural products,” Chief Sustainability Officer Dan Malone said during the Q2 earnings conference call on Aug. 5.
2. New trends favor Alamo Group
Despite its negative impact, especially in the first half of 2020, the COVID-19 pandemic also caused some significant shifts in trends that will be beneficial to Alamo now. The company’s agricultural equipment sales are specifically improving because of these factors. According to some research, the recent rise in commodity prices will probably boost cash crop income by approximately 30%. This will lift farmers’ incomes, enabling more purchases of new equipment.
According to information compiled by Alamo competitor Deere & Co. (NYSE:DE) for its fiscal third-quarter investor presentation, North American sales of large agricultural equipment are expected to rise by 25% during its fiscal 2021, while small equipment will grow by 10%. The forecasts say that Asian sales will increase “significantly,” European sales will rise by 10% to 15%, and South American demand for tractors and combines will jump by 20%.
This trend has clearly given Alamo Group’s agricultural division a much-needed lift. Earnings reports from before the COVID-19 pandemic showed agriculture vehicle sales declining. In Q2 2019, these sales dropped 6.6% year over year. In the comments accompanying that quarter’s report, CEO Ron Robinson said this was because of adverse weather, trade tariffs, and “prolonged soft agricultural commodity prices.” In Q1 2020, sector sales dropped 4.4%. However, agricultural equipment sales are hot in 2021, surging by 35% year over year in Q2. Sales are also up from 2019, though direct comparisons are more difficult to make because the company has reorganized how its division sales are reported.
CEO Robinson noted the company’s agricultural division “benefited from robust demand for its mowers and agricultural implements from farm and ranch customers.” He also said non-governmental purchases in the industrial division had improved, “most notably in our Morbark business which serves the forestry and tree care markets.” With more people opting for rural or semi-rural lifestyles, more equipment will be needed to improve land, remove brush to prevent wildfires, and the like. These sales are being driven by the same factors giving the recreational vehicle market a long-term surge, and creating growth for retailer Tractor Supply (NASDAQ:TSCO) as sales of mowers and utility vehicles climb.
Is Alamo looking bullish?
Alamo Group looks like a good pick among lesser-known industrial stocks. Its overall growth both relative to 2020 and as part of a long-term pattern stretching back into 2018 is strong. Its previously weak agricultural division is now thriving because of new but apparently persistent trends. It pays a dividend, and it managed to do so throughout the worst of the pandemic’s economic impacts, too. Now, it’s turning out record results despite some supply chain issues. Demand for food and forestry products isn’t likely to decline any time soon, and the overall outlook for this equipment company is positive into the medium term, and probably longer.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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