Atmus Filtration: Not Passing My Filter (NYSE:ATMU)

Shares of Atmus Filtration (NYSE:ATMU) have been doing alright in 2024. The former filtration business of Cummins (CMI) has seen strong returns this year, after a flattish outlook for the year alleviated investor’s concerns.

Solid 50% returns year to date have re-rated the stock from a 10 to about 15 times earnings multiple, a bit too much if you ask me, amidst a flattish operating performance. More so, I am concerned on the overall challenged position of the firm in the long haul.

Filtration Business

Atmus is the former filtration business of engine maker Cummins, which spun out the business in May 2023 through an IPO. The company provides filtration products for both on-highway commercial vehicles, and off-highway agriculture, construction, mining and power generating vehicles.

These products are used to both lower emissions and improve asset protection, with many products sold under the Fleetguard brand. The business has been founded over 60 years ago and generates about $1.6 billion in sales, mostly tied to fuel, but also lube, air, ventilation, chemical and hydraulics.

In an overall filtration market of $70 billion, the company targets an addressable market of $13 billion. These products are (mostly) sold to large OEMs like Deere, Daimler, Komatsu and Cummins.

Of course, there is a long-term overhang to the business, that of (further) electrification of engines, alleviating the need for filtration altogether. In the meantime, more stringent emission standards boost demand for these products, creating somewhat of a balancing act.

Valuation Talks

The company went public at $19.50 per share as a total share count of 83 million shares granted the company an equity valuation of $1.62 billion. Including $540 million in net debt, this valued the business at $2.2 billion.

This seemed like a very reasonable valuation with sales reported at $1.56 billion in 2022 on which operating profits of $200 million were reported. Based on $234 million in EBITDA, leverage ratios came in at 2.3 times.

With earnings power seen around $1.50 per share, valuations looked quite reasonable. This was certainly the case after the company posted solid growth in the first half of 2023, seeing full-year sales up to a midpoint of $1.60 billion. The real gains were made on the bottom line, with EBITDA seen advancing to $285 million, driving adjusted earnings in excess of $2 per share, in fact, to a midpoint of $2.15 per share.

After initially moving down to the high-teens, shares had advanced to the $23 mark by December of last year when I last covered the shares. While third quarter sales were down a bit, the company upped the full-year guidance, seeing earnings around $2.25 per share, as EBITDA of $295 million meant that leverage came down to just about 1.5 times.

Trading around 10 times, the valuations looked quite compelling, although the lack of sustainable growth prospects made me cautious, a bit too cautious with the benefit of hindsight.

Shares Have Re-Rated

Since the start of the year, shares have seen a huge rally, having risen some 50% to current levels at $34 after a fierce rally in March and April.

In February, the company grew full-year sales by 4% to $1.63 billion. The company posted flattish GAAP earnings at $2.05 per share, with adjusted earnings up eighteen cents to $2.31 per share. Most of the discrepancy was due to separation costs from Cummins.

Net debt was reported at $432 million while full year adjusted EBITDA advanced to $302 million, for a leverage ratio of just 1.4 times. These results were quite solid, as the company guided for 2024 sales to come in largely flattish between $1.61 and $1.67 billion. The company guided for flattish EBITDA, actually seeing adjusted earnings down slightly to $2.10-$2.35 per share.

In March, the company broke loose from its former parent, in which Cummins exchanged shares into the firm in exchange for its own stock.

In May, the company posted first quarter sales of $426 million and change, up two percent on the year, with adjusted earnings down seven cents to $0.60 per share. Despite the shortfall on the bottom line, the company subsequently maintained the full-year guidance.

Having broken loose of its former parent and operating with a stronger balance sheet, Atmus announced a quarterly dividend of $0.05 per share in July, but more important is that it announced a $150 million share buyback program.

In August, Atmus posted resilient second quarter results, with revenues up more than 4% to nearly $433 million. Subsequently, the company hiked the midpoint of the full year sales guidance to $1.65 billion. After a modest decline in earnings in the first quarter, the company grew adjusted earnings by eight cents to $0.71 per share.

Net debt was pretty flattish at $440 million, with the company guiding for full-year EBITDA around $313 million on the back of slightly higher sales and margins. The company subsequently hiked the full-year earnings guidance by five cents to $2.15-$2.40 per share.

Re-rating Is Complete

Trading at $34, the company has re-rated from about 10 times earnings to a roughly 15 times earnings multiple, driven by a relatively flattish sales performance. This means that the re-rating is complete. While leverage is under control, as there is financial room for share buybacks, the reality is that a 15 times earnings multiple seems rich enough given the outlook for the business.

That said, the real opportunity is now gone as a 10 times earnings multiple was compelling enough, despite questions on the positioning of the firm. At the current price, it is evident that the opportunity was around the $20 mark, as real appeal is no longer found here, making it easy for me to remain uninvolved with the stock, as the company does not pass my filter.