ThamKC
Nearly a year ago, I concluded that Arcosa, Inc. (NYSE:ACA) had seen a strong start to 2023. The company has seen a strong first quarter, as the full-year outlook looked conservative, even after it was raised. With large wind tower orders coming up for the current years, long-term prospects continued to look good.
As it turned out, the company has seen a solid 2023 and started the year 2024 with a new and interesting bolt-on deal, all of which reinforces my belief in the quality and positioning of Arcosa. Shares have done quite alright and while the company commands a small premium to the overall market multiple, I remain upbeat on the long-term prospects for the business, looking to get involved on dips here.
An Infrastructure Play
Arcosa has been a spinoff from Trinity Industries (TRN) back in 2019, creating a pure play on infrastructure. At the time, a $1.4 billion business, the company has grown on the back of inflation, organic growth and dealmaking efforts towards a $2.3 billion revenue base in 2023.
The company has been in business for more than 80 years and by now has grown to employ over 8,000 workers across three segments: construction products, engineered structures and transportation products.
Construction products is the largest business and the most profitable one, with the unit generating a billion in sales in 2023, accompanied by decent EBITDA margins equal to 25% of sales. Activities include natural & recycled aggregates, specialty materials, and construction site support.
Engineered structures is a near $900 million segment, although that EBITDA margins in the mid-to lower teens are not so impressive, with this segment focusing on utility structures, wind towers, and traffic & telecom structures.
The last segment is smaller, a >$400 million transportation products business, with mid-teens margins generated from barges, marine components and steel components.
While sales have grown by nearly a billion since the spinoff from Trinity in 2019, EBITDA numbers have essentially doubled over time, making that margins have expanded over time as well. Organic growth, M&A and stimulation policies such as the Inflation Reduction Act and Infrastructure Bill provide a growth impetus to the business as well.
These achievements have been reflected in the share price itself, as a $30 stock around the time of the spinoff in 2018 has steadily risen to current levels of $80 per share, after recently trading at highs of nearly $90 per share.
Early last year, the company posted 2022 results, a year in which adjusted earnings were up 13% to $2.19 per share. As the company announced the divestment of the storage tank business during 2022, the company guided for flattish reported sales in 2023. After a big $750 million wind tower order in March of last year, the outlook for the coming years looked solid, especially after the company posted strong first quarter earnings.
With 2023 sales seen at a midpoint of $2.25 billion and EBITDA seen around $345-$370 million, the outlook was either conservative after a strong first quarter, or realistic. Seeing earnings power at $2.50 per share, or $3.00 per share in case of an upward surprise, I believed that numerous good qualities were priced in at $70 per share.
On Fire
Fast forwarding to February of this year, the company posted solid 2023 results. Full-year revenues rose by 3% to $2.31 billion, coming in ahead of the original guidance, with comparisons made more difficult after the tank storage divestment. The company posted GAAP operating profits of $217 million and net earnings of $159 million, equal to $3.26 per share. These earnings include a pre-tax profit of around $35 million from asset sales, equal to about half a dollar per share, with adjusted earnings reported at $3.23 per share, all looking very strong.
Net debt is reported at $464 million, resulting in a leverage ratio of 1.2 times based on EBITDA of $368 million. The company guides for continued progress, with 2024 sales seen up to $2.46-$2.72 billion, at a midpoint of $2.59 billion seen up 12% on the year before. Adjusted EBITDA is seen around $400 million, plus or minus twenty million. This compares to a $368 million adjusted EBITDA number in 2023 (which even included a $22 million gain on the sale of land). If this is realistic, pre-tax earnings could rise by around a dollar, making realistic earnings likely improve towards $4 per share.
With 49 million shares trading at $80, the market value of Arcosa is valued at $3.9 billion, or at nearly $4.4 billion if we factor in net debt. This values the business at just over 2 times sales reported in 2023, 12–13 times EBITDA and around 25 times earnings, although the forward-looking measure could fall to 20 times earnings.
A Bolt-On Deal
In March, Arcosa announced a bolt-on deal as it announced a $180 million cash deal to acquire Ameron Pole Products from NOV (NOV). Founded in 1970, Ameron produces engineered steel and concrete poles for a wide range of applications including lighting, traffic, electric distribution and telecom. The business employs 250 workers who work in 4 manufacturing sites across the country.
The business generated $94 million in sales and $20 million in EBITDA, suggesting that a reasonable 2 times sales multiple and 9 times EBITDA multiple has been paid, for what is a pretty profitable business.
Pro forma net debt will jump to $625 million, yet leverage ratios should be pretty manageable at 1.5 times given the improved earnings performance. The revenue contribution will boost pro forma sales 3-4% as the overall valuation multiple looks quite fair. The deal closed quickly, in fact, early in April.
And Now?
With earnings power seen topping $4 per share, the business is going really well, as the share price advancement has been more than deserved. Following the re-rating, a 20 times multiple seems quite reasonable, amidst a reasonable leverage ratio at about one and a half times.
Quite frankly, I am turning much more optimistic about the business here, certainly as specialty aggregates companies have commanded premium multiples in this market on the back of these secular growth trends. Given all this, I am turning more upbeat on the Arcosa, Inc. business, yet I require and like a better entry opportunity, either by shares selling off to the $70 mark, or continued growth into the valuation amidst a stagnant share price.
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