04-02-13 AIMC trade idea

The AIMC 2.75% converts were recently offered at 120 vs. 27.22 at Jefferies. This is a very small issue at $85m so 4m is the most I want to own. I like the profile of this balanced convert, which has a 2.3% current yield and 21% premium and five years until the put date. Using 450 credit spread and 30 vol., the bonds model about fair, which in this environment is about the best you can do for a balanced name in the 120s. The trade-off is that it is a small, illiquid issue.

The converts have come in about 0.75 points over the past month. My guess is that outrights are looking to exit after a strong run-up in the stock. Additionally, AIMC’s realized vol. has declined with the stock’s upward move but has been much higher in past years.

Theo delta for the convert is 71, which is where I initially want to be but I would look to aggressively buy stock on pull backs to get to as much as 10 deltas light.

To the upside, on 71 delta, the converts nuke to 141.7 at the soft call trigger of 35.586 (11.7 points). The converts are soft-callable on 3/1/15 (about 2 years) with a max make-whole of 8.25 points decremented PV of coupons. I would expect the bonds to expand by about 2 points at this price.

To the downside, the converts cross par at 2.75% up 40.2% at 19.51, which seems reasonable for a 5 yr maturity.

Additionally, we actually sold these converts in July 2012 at 92.81 vs. 14.92. If we nuke down on a 71, the converts nuke to 88. Granted, time has passed and the converts were subject to theta decay but it does show that this particular name has held well to the downside even in a less favorable convert/credit environment.

AIMC currently pays 8c quarterly dividend (1.21% yield) but the converts are fully dividend protected from zero. Borrow is GC.  You make 3.5 points on a $36 cash take-out.

Business Description

Altra Holdings (AIMC) is a manufacturer of a wide range of mechanical power transmission (MPT) for a diverse group on industries including energy, mining, transportation, and turf and garden. Products include 1) clutches and brakes for elevators and commercial lawn mowers, 2) gearing for conveyors and packaging machinery, 3) engineered couplings for turbines, 4) Power transmission components for machine tools, and many more industrial type products.

AIMC is the world’s largest manufacturer of clutches and brakes, which are used to hold a piece of industrial equipment to keep it from moving. You can find these on top of an oil rig to control the cables that goes down into the ground to extract the fuel or in a helicopter to keep the rotors from spinning only in one direction and not letting them back drive. In gearing, AIMC is one of many manufacturers in a highly fragmented market. These are used in conveyor systems, military vehicles, and sewage plants. Industrial couplings connect two pieces of rotating equipment in applications such as oil refineries.

All together, AIMC sells into 36 different industrial markets with a mix of early (20%), mid (40%) and late cycle (20%) industries. The company’s products serve many niche markets that are difficult for competitors to enter.

40% of sales were from the aftermarket.

55% of sales North America; 31% Europe; 14% Asia and rest of world

AIMC is the number 1 or 2 player in over 50% of the products segments that is serves.

17% of US employees are unionized; 59% of European employees are unionized

Industry Description

The industrial power transmission products market generated $36B, divided into three areas 1) Mechanical Power Transmission (MPT), 2) Motors and generators, 3) Adjustable speed drives. AIMC only competes in MPT, which is a $19B market but very fragmented with over 1,000 small manufacturers.

Equity analysis

AIMR stock trades at 14.6x PE to 2013 estimated EPS of $1.81 and 12.3x PE to 2014 estimated EPS of $2.12. Management has been conservative in the guidance in past years and is likely too low for 2013 given the recent pick-up in industrial activity. AIMC participates in a broad range of industrial markets that are seeing significant strength. Revenue growth for 2013 is expected to be 2% and for 2014 to be 5%. These numbers could be too low in a strong cyclical rebound. I think the company could earn as much as $3 in 2014, which using a 12 multiple get to $36 per share.

However, the stock is up 21% year to date and could be due for a pull back. We could get lighter delta on weakness.

AIMC stock has been volatile on earnings with fairly large moves in 6 of the last 8 quarters including one quarter when the stock was down 27%.

earnings   date stock   reaction


















Potential volatility events include:

AIMC is in the middle of a 3 year transition to a SAP implementation. These large scale changes could often lead to disruptions from quarter to quarter. We have seen SAP cause short term problems for many companies.

The company has a large exposure to Europe (31%), which could have unexpected results.

AIMC is hosting an analyst day for the first time in the company’s history on May 16, 2013.

Credit analysis

AIMC has low leverage with net debt/ebitda of 1.67x. Management has a strong history of maintaining a strong balance sheet and one of its goals is to pay down $27m of debt in 2013 using free cash flow.

The company has generated positive free ash flow in each of its 9 calendar years since it began in 2004, including 2008 and 2009.

The negatives are that AIMC is a small cap company at only $713m. It also has a history of making acquisitions which could potentially increase leverage.

Cash =$85m

Revolver due 11/20/17 = $79m ($200m size)

Term loan due 11/20/17 = $100m

2.75% Convert put 03/01/18 = $85m

Total debt = $264m


Debt/EBITDA = 2.46x

New Debt /EBITDA = 1.67x

LTM CFFO = $60m (2013 expected $80m)

Capex = $31m (2013 expected $30m)

LTM FCF = $29m (2013 expected $50m)

Market cap = $713m









































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