IIJA Spending And Automation Will Lift Heavy Equipment Demand

Key Takeaways

• Elevated infrastructure spending and optimized operational initiatives are expected to boost Alta's revenue and profitability in key segments.
  
• Strategic growth through M&A and investments in automation promise long-term revenue growth and earnings stability.
  
• Various sector challenges, including economic uncertainty, market pressures, and supply chain issues, pose threats to Alta's revenue growth and profitability.

Catalysts

Owns and operates integrated equipment dealership platforms in the United States and Canada.

• The backlog of federal infrastructure spending under the IIJA program, along with elevated state DOT budgets in key Alta regions, is expected to reinforce demand for heavy equipment rentals and service, potentially boosting revenue and profitability in the Construction Equipment segment.
  
• Improving utilization rates of environmental and specialty machines among channel partners suggest that demand for these products is on the rise. As supply-demand imbalances normalize by mid-2025, Alta is well-positioned to benefit from enhanced equipment sales, likely improving revenue and gross margins.
  
• The company's focus on operational efficiency initiatives, including cost optimization, streamlining SG&A, and improving fleet utilization, is expected to enhance profitability. This should contribute positively to net margins and earnings in 2025.
  
• Alta's emphasis on strategic growth and M&A, particularly in high-margin recurring business lines and expanding exclusive distribution rights, is expected to bolster long-term revenue growth and earnings stability.
  
• Investments in warehouse automation, fleet electrification, and enhanced service offerings in the Material Handling segment align with e-commerce growth and increased automation adoption, supporting a strong long-term business outlook and potential net margin improvements.

Alta Equipment Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Alta Equipment Group's revenue will grow by 3.2% annually over the next 3 years.
• Analysts are not forecasting that Alta Equipment Group will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Alta Equipment Group's profit margin will increase from -3.5% to the average US Trade Distributors industry of 5.9% in 3 years.
• If Alta Equipment Group's profit margin were to converge on the industry average, you could expect earnings to reach $122.7 million (and earnings per share of $3.83) by about May 2028, up from $-65.1 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 3.3x on those 2028 earnings, up from -2.2x today. This future PE is lower than the current PE for the US Trade Distributors industry at 19.4x.
• Analysts expect the number of shares outstanding to decline by 0.87% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

Alta Equipment Group Future Earnings Per Share Growth

Risks

• The construction equipment sector faced a challenging year with industry-wide oversupply and tightening credit conditions, leading to a 10.2% decline in new and used equipment sales, which could impact the revenue growth of the company.
  
• The North American lift truck market experienced a decline in new order bookings, impacting future sales velocity and potentially affecting revenue in the Material Handling segment.
  
• Pricing pressure in the used equipment market presented challenges that could continue to compress net margins and negatively affect overall profitability.
  
• Economic uncertainty and macroeconomic challenges, such as higher interest rates and election year uncertainty, weighed on market demand, posing risks to future revenues and earnings.
  
• Supply chain constraints and challenges around charging and fueling infrastructure for electric vehicles present risks that could impact Alta's ability to capitalize on new market opportunities, potentially affecting future earnings growth.

Valuation

• The analysts have a consensus price target of $9.275 for Alta Equipment Group based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.1 billion, earnings will come to $122.7 million, and it would be trading on a PE ratio of 3.3x, assuming you use a discount rate of 11.4%.
• Given the current share price of $4.34, the analyst price target of $9.28 is 53.2% 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.