As promised, here is part 2 of my ALPP series! This article will now discuss my forecasts for FY 2023 with a similar exercise as Part 1, which forecast Q3/Q4 2022. If you haven’t read that yet, you can find it HERE.
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Let’s get right to it!
Introduction / Rules of the Road
I’m keeping this section here from Part 1… please read and refresh.
The entire purpose of this article is to give you some tools to set your expectations for the rest of FY 2023. This is even more tricky than 2H 2022 as we’re now trying to forecast an entire year.
You guys did a great job (so far) not misquoting me so thank you for that! Just as a reminder, let’s go through some ground rules.
- This model and my current assumptions will 100% not be correct. They are a tool for YOU to use and tinker with and decide what YOU think is most likely.
- The current assumptions I’ve provided are supposed to provide a wide range of outcomes, it doesn’t mean they won’t do better or worse. I’ll discuss where those assumptions came from.
- My opinion on where I think they land at the end is just that, an opinion. There’s a rhyme and reason to it, but it’s an opinion at the end of the day.
So let’s all be responsible with this exercise please!
The Model – Base Case
You can find the model HERE as a read only version. I’ve included the 2022 model in there as well so you should be able to see all of it in one place. You should also be able to copy and paste this into your own excel/google sheet and play around with the numbers.
As with my prior article – when modeling out ALPP, you need to be VERY cognizant of the fact that they have very distinct business segments. Each of these segments have completely different business profiles, asset intensity, risk, and expected profitability. For example, the sheet metal business is absolutely nothing like drones.
So just like before, we’re going to forecast by segment.
The Model -FY 2023 Forecast
Using our base financials, we need to make some key assumptions for forecasting FY 2023.
Assumption 1 – 2022 Base
Since we don’t have full year 2022 done yet, we have to rely on something for our forecast for the 2nd half of the year. To keep this simple, I’ve assumed that the MEDIAN of my prior model will be the base for our 2023 model. If you are extra pessimistic or optimistic, you can always revise up or down the 2022 figures. But for now, I’m going to use the median.
Assumption 2 – Annual Revenue Growth
Forecasting out an entire year of revenue growth should be a bit easier to visualize this time. We also have company guidance of $150m for FY 2023. While company guidance is a good sanity check for where our models are coming in and something to compare the model to, we should never 100% assume that’s our FY 2023 revenue.
So as good DD’ers (is that a word) we should work out our own assumptions. Here’s what I did:
- LOW – assuming a pretty poor year for them, I assumed that their revenue would grow only by approximately forecast 2023 inflation, which is currently about 3.5% from some estimates. I have a hard time believing it could be much worse than this barring a massive recession, so a good realistic low band would be inflation level of growth.
- HIGH – For their relatively lower growth segments of Construction and Manufacturing, I have assumed a healthy 15% revenue gain, which doesn’t seem that unreasonable. For Technologies and Defense, which are a higher growth area, I’ve assumed a high growth of 25%, which would be fantastic if achieved, but a lofty goal.
Two caveats to the above.
First. let’s talk Aerospace… We all know the drone contract is done and signed. So we have to use some wildly high growth rates on both the low and high ends of our bands. Current PR states that it’s worth around 25m in revenue per year. My low end therefore assumes 20m in revenue which considers scenarios of delays, issues, etc. My high end considers them exceeding the contract with other sales and reaching 30m+.
Second, all of this assumes no M&A activity, even though a drone acquisition is in the works. There are WAY too many unknowns with M&A and who knows what size of acquisitions are in the works. So for now we will just assume organic growth.
Assumption 3 – EBIT Margins
All indications from the company are the margins are getting better as inflation cools and the company is able to more efficiently conduct business as well as pass on price increases. However, we as good DD’ers need to factor in the scenario that margins don’t really keep improving and maybe even drop some.
Given that, here’s what I did (with caveats):
LOW – I assumed EBIT margin contraction of 2.5% from my prior median, meaning that some segments would be in a loss.
HIGH – On the opposite end, I broke it down my segment. For Construction and Manufacturing, whose 2022 margins are well below potential, I assumed a 7.5% increase. For Defense, which I already mentioned is near full potential margin (in my opinion), I assumed no increase. For Technologies, I limited it to 5% as their margins are getting closer to what I expect their potential to be – around 15%.
Once again, let’s talk Aerospace. Drones are a very high margin product which require millions of dollars in R&D and countless years to develop. This drone deal is HUGE for the company, and you’ll see why.
On the low end, I don’t see how margins can get lower than 15% even in a really bad scenario. But just to give us a conservative low-end, I’ve assumed 15%. For the high end, I don’t think it’s unreasonable at all to assume a 30% EBIT margin on these.
I am super excited to see how this segment performs throughout the year, this could be one of the biggest deals for the company yet.
Assumption 4 – Net Income
Like before, this is basically just my estimate of interest expense. I am just going to assume flat interest expense YoY. The company is relatively un-levered, so unless there’s some huge debt offering along with an acquisition, I can’t imagine debt increasing too much.
Assumption 5 – Corporate Expense
Corporate expenses are those un-allocated to the segments and are mostly the compensation expense to Kent and his management team. There is also some interest and depreciation there as well.
Unlike my last analysis, I will assume this grows at a modest 6.0% from the prior year in both scenarios. I can’t imagine a massive swing here either as the central team is rather steady.
Assumption 6 – Cash Flow!
This is new for this exercise, but I have also forecast a rough gauge of “adjusted” cash flow from operations. I use a very simplified formula versus cash flow from operations, which includes swings in working capital which generally wash out over multi-year periods.
My Sam Aker™ (jk) formula for adjusted cash flow is just EBITDA plus stock compensation. This roughly gives you the cash available to fund temporary working capital deficiencies, fixed assets, and debt financing. So it’s not perfect, but it is a simple tool I use to see cash generation.
For Depreciation and Amortization, I assumed a flat value year over year just to keep it simple; the main purpose of my article was to analyze book income. But this should help give a reference point to their approximate cash flow.
Results
Here is a summary of the model we just developed along with 2022 for reference.
My main takeaways when I saw the results were:
- The company guidance of 150m doesn’t actually seem that farfetched as it’s quite near my median and fits pretty well into my assumptions, which I don’t think are totally out of left field!
- Even with pretty low assumptions on margins and revenue growth, there is still a minimal level of profitability on the low end.
- Similar to the above, the assumptions I used signal a pretty high likelihood of cash flow positive (using my metric) for 2023.
But enough of that crap, let’s get to the spicy takes!
Opinion Time
Ahh my favorite part… where to begin.
While I generally like to sit towards the median and being conservative, I think there is much more upside than what my median is showing. This is opinion Sam speaking here, not mathematical Sam, so bear that in mind.
But if you dig into exactly where margins are being driven from, it’s mostly Defense, Technologies, and Aerospace. These three segments have been the brightest spots of ALPP over the last year or two and have mostly weathered the macroeconomic turmoil. Let’s discuss.
Aerospace bagged a massive contract on high margin products which will likely add a huge boost to the bottom line. It can easily negate any wind-sucking from Construction and Manufacturing if it persists.
Defense has really been the only segment doing well from a margin perspective in the past, and we’re still getting PR’s and other guidance saying that top-line growth is continuing. So nothing about that makes me think margins are shrinking.
Lastly, Technologies should really get running with RCA getting another full year under its belt as part of ALPP. While Elecjet may be a bit of a margin drag as it’s still being built up, RCA’s PR’d growth and overall target margins are very healthy.
To me, Construction and Manufacturing are more of the unknown. I honestly would not be surprised if they trend more towards the low end versus the other segments. They are much more sensitive to inflation and general macro conditions and there’s no guarantee 2023 is going to be better than 2022.
But that’s the magic of the ALPP model – it’s a diversified company that can weather these types of issues. So even if Construction and Manufacturing still have some issues, we’re seeing such high upside in the other segments, especially with drones.
Should I mention how massive I think that drone deal is? I still think it has been the best PR the company has ever released, with the RCA acquisition being second.
Anyways – if you couldn’t tell, I’m more pessimistic about their results for 2022 but super excited for 2023 upside.
Let’s be clear here, things can go wrong in 2023 that can derail some or all of this. Nothing is guaranteed. However, especially with this drone deal and it’s high profitability, they have WAY more momentum going into 2023 than they did going into 2022.
Anyways – all we can do is wait and see… I think Q2 2023 will be a very telling 10Q and could set the tone for the whole year.
I’ll end there – thanks for reading! Reminder again to follow me on Twitter or Facebook if you haven’t yet.
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DISCLAIMER – AT THE TIME OF WRITING THIS ARTICLE I HAVE A LONG POSITION IN ALPP. THIS ARTICLE IS NOT FINANCIAL ADVICE AND IS INTENDED ONLY FOR EDUCATIONAL PURPOSES. I AM NOT A FINANCIAL ADVISOR. DO YOUR OWN RESEARCH.
