Only sometimes do investors get the opportunity to consider cyclically favorable sectors and, even harder still, to successfully pick a stock within the sector that is set to outperform its peers and the broader market. Today, the American economy has given markets a new set of flashing lights that can point individual investors - and more prominent asset managers - into directional investment decisions.
As a widely followed economic indicator, the ISM manufacturing and non-manufacturing PMI reports have developed critical trends over the past six months, a dynamic that should not be taken lightly.
After announcing a significant increase across the board during the first quarter 2023 earnings results, Alta Equipment Group (NYSE: ALTG) is the stock set to outperform. The Transportation equipment sector has been showing signs of expansion since April 2023. In contrast, most other manufacturing sectors are flashing contraction all over.
Using this framework, investors can look to possibly be long the few - or only - growing sectors, and especially the specific stock(s) that are reasonably expected to outperform as well.
Drilling Down
Within the inputs that make up the PMI reports, there are three major ones that investors and traders look into to gain a clearer picture of what is going on. New orders, which reflect underlying customer demand, have shown expanding trends for the transportation equipment industry, where Alta operates. Production, a main gauge of current volume conditions driving earnings growth, has also favored Alta's niche.
Lastly, employment, which can point to the underlying capacity needs or excesses within a given space, has chosen the transportation equipment industry as the designated employer. This makes the perfect storm for investors to deduce one thing: Increasing product demand has led to rising production, which will likely trickle down to rising earnings. This trend is expected to continue, taken from the willingness to keep hiring workers.
During Alta's latest earnings presentation, management describes the current business conditions affecting the firm. In a nutshell, executives point to the growing demand for the various products offered by Alta and indicators firmly positioned for the continued growth of said demand.
These trends enabled Alta to grow revenues by as much as 26.8% over the year, increased pricing power due to heating demand, and expanded industry trends allowed for gross margin expansion. First quarter 2022 gross margins were only 27.5%; today, they stand at an improved 28.8% with no signs of slowing down further expansions.
Unnecessary to say that current and further margin expansions on the back of rising demand will drive an earnings increase for the next quarterly earnings date, set to be on the eighth of August 2023.
Alta analyst ratings, which may be pricing in the continued growing trends in the business fundamentals, suggest a current 40% upside scenario as a consensus price target. With a top-side price target of $25 per share, it would seem that all analysts agree - as taken by consensus and top-side targets -that the all-time high price in the stock could be only a foundation.
Management sent a resounding affirmation surrounding the potential undervaluation in the stock, as they allocated up to $12.5 million into share repurchases. This sizable program would represent nearly 2.3% of the company's market capitalization. This percentage reflects ultimate confidence in the business prospects by none other than the business insiders themselves.
Market Perspective
Now that analysts are boasting their bullish opinions for the stock, coupled with management affirmations of just how undervalued the stock may be, it is time for investors to double-check what broader markets are thinking regarding the current price. Comparing Alta to relatively close peers, companies like H&E Equipment Services (NASDAQ: HEES), Titan Machinery (NASDAQ: TITN), and Custom Truck One Source (NYSE: CTOS) will reveal a key trend.
Alta has outperformed every one of these names, blowing past by as much as 67.2% during the past twelve months. Beneficial industry trends may have initiated the widening performance gap. However, other metrics are pointing to expectations of continued outperformance.
On a forward price-to-earnings ratio basis, traders and investors can value Alta and its peers to find subtle hints as to the sector's future direction. A forward P/E differs from a traditional P/E only in the sense that it considers expected next-year earnings rather than past twelve-month earnings. Alta trades at a forward P/E of 28.1x, making it the highest ratio in the peer group, with the above competitors selling for a 10.0x to 19.0x range.
Some may argue that this only makes Alta the more 'expensive' alternative; however, professional asset managers understand that this can mean the opposite. There is a reason markets are willing to pay a higher premium for each dollar of future earnings, as the expectation is that Alta will receive the most significant industry benefit relative to peers.
Considering all the fundamental stars have lined up, virtually all participants agree that Alta stock will have a massive upside shortly. Investors can get ahead of the upcoming catalyst, August quarterly earnings, which may ride the expanding margin wave and surprise markets with a bull run.