Reshoring And Automation Will Drive Secular Demand

Key Takeaways

• Margin expansion, operating leverage, and recurring revenue growth are expected as a result of disciplined execution, supply chain localization, and automation market demand.
  
• Strategic M&A, value-added solutions, and capacity expansion position Allient for strong market share gains and sustained earnings growth ahead of peers.
  
• Costs and margins face pressure from supply chain risks, labor challenges, market shifts, technology adoption, and reliance on cyclical, mature sectors.

Catalysts

Designs, manufactures, and sells precision and specialty-controlled motion components and systems for various industries in the United States, Canada, South America, Europe, and the Asia-Pacific.

• Analysts broadly agree that the Simplify to Accelerate NOW initiative will deliver $6-7 million in annualized savings, but with three consecutive quarters of gross margin expansion and the company's demonstrated discipline, there is significant potential for even greater margin improvement and operating leverage, possibly driving net margins higher than current estimates.
  
• The consensus expects efficiency gains from the Dothan facility expansion by late 2025, but given the company's rapid scale-up and robust order growth in power quality and defense, earlier-than-expected capacity benefits could materially lift both revenue and operating profit in the next 12 to 18 months.
  
• Allient's aggressive supply chain localization and rare earth magnet mitigation strategy uniquely positions it to win market share as OEMs seek reliable, tariff-resilient partners, paving the way for accelerated revenue growth from reshoring and infrastructure investment tailwinds in North America and Europe.
  
• The accelerating adoption of automation, robotics, and Industry 4.0 technologies is set to drive above-market demand for Allient's custom-engineered motion and power control solutions, supporting a long-term step-change in recurring revenue and gross margin expansion.
  
• Strategic emphasis on value-added engineered solutions and the company's track record of niche M&A will amplify cross-selling and pricing power, resulting in sustainable EPS growth well ahead of peers and reduced earnings cyclicality versus consensus assumptions.

Allient Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Allient compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Allient's revenue will grow by 3.8% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 1.9% today to 6.3% in 3 years time.
• The bullish analysts expect earnings to reach $36.2 million (and earnings per share of $2.14) by about July 2028, up from $9.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 27.4x on those 2028 earnings, down from 67.5x today. This future PE is lower than the current PE for the US Electrical industry at 28.7x.
• Analysts expect the number of shares outstanding to grow by 0.5% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.08%, as per the Simply Wall St company report.

Allient Future Earnings Per Share Growth

Risks

• Ongoing geopolitical and trade tensions, especially restrictions on China-sourced rare earth magnets and evolving tariffs, risk raising sourcing costs and causing supply chain disruptions, which could increase Allient's cost of goods sold and compress net margins.
  
• Labor shortages and rising wage pressures in North America and Europe may elevate manufacturing costs for Allient, creating continued headwinds for margin expansion and potentially weighing on earnings.
  
• Increasing commoditization within Allient's industrial and vehicle markets, as competitors focus on price over specialty, could erode pricing power and put downward pressure on revenues and gross margins, especially if Allient's shift away from high-volume, lower-margin segments restricts sales volume.
  
• The accelerating pace of automation and digitalization among industry peers could outpace Allient's ability to invest and integrate, risking lost market share and stagnating revenue growth if technology adoption is insufficient to keep up with competitors.
  
• Allient's exposure to cyclical and mature end markets, such as transportation and industrials, introduces significant earnings volatility and the risk of underutilized production capacity in economic downturns, which may negatively affect both revenues and operating margins over the long term.

Valuation

• The assumed bullish price target for Allient is $45.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Allient's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $45.0, and the most bearish reporting a price target of just $32.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $576.9 million, earnings will come to $36.2 million, and it would be trading on a PE ratio of 27.4x, assuming you use a discount rate of 9.1%.
• Given the current share price of $39.14, the bullish analyst price target of $45.0 is 13.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.