Atai Capital: AstroNova Inc. ($ALOT) Investment Case
Introduction
In their Q4-2024 investor letter, Atai Capital discusses their long-standing position in AstroNova Inc. ($ALOT), which has frequently been their largest holding since inception in January 2023. The letter provides an update on the investment thesis and performance, with particular focus on recent capital allocation decisions and management changes. Despite some setbacks, Atai Capital maintains their position in AstroNova, citing improved management and attractive valuation as key reasons for their continued investment.
Investment Highlight: AstroNova Inc. ($ALOT)
Business Overview
- Provider of data visualization technology solutions
- Operates through two segments: Test & Measurement (tied to narrowbody aircraft production) and Product Identification
- Has been Atai Capital’s largest position since inception in January 2023
Investment Thesis
- Focused on return to normalized earnings in both business segments
- Test & Measurement recovery tied to narrowbody aircraft production
- Product Identification segment recovering from ink/supplier/retrofit issues
- Business performance has been in line with expectations since purchase
Performance Analysis
- Business Improvement:
- Run-rate EBITDA increased from $11M at purchase to $21M+ (as of fiscal Q2-2024)
- Normalized operations achieved before Boeing strikes and PID shipment delays
- Capital Allocation Concerns:
- $20M acquisition of MTEX in May 2024 has significantly underperformed expectations
- MTEX reported operating losses of $1.4M in FY-Q2 and $1.1M in FY-Q3
- Revenue significantly below expectations at $0.8M (FY-Q2) and $1.7M (FY-Q3)
- Acquisition described as poor use of shareholder capital
Management Changes
- CFO replacement shortly after MTEX acquisition announcement
- New CFO Tom DeByle previously served at multi-billion-dollar industrial company Standex
- DeByle’s track record includes overseeing EPS growth from $1.49 to $4.72, margin expansion, and 400% share price increase at previous company
- Atai Capital views new CFO as significant improvement and counterbalance to CEO
Recovery Potential
- Management expects MTEX to return to profitability in 2025
- MTEX’s printhead technology may help diversify and reduce reliance on ink suppliers
- TRAX software provides increased visibility into customer ink supply and maintenance
- Atai Capital remains conservative in projections, assuming break-even for MTEX
Valuation and Outlook
- Current market cap of $88M and enterprise value of $137M
- Projected mid-to-high twenty millions in EBITDA by 2026
- Potential for $30M+ EBITDA by 2027 as $4M+ of Honeywell royalty expenses expire
- Trading at less than 5.0x 2027 EBITDA and 7.0x UFCF
- Atai Capital advocates for substantial share buyback if shares remain depressed after balance sheet deleveraging
Risks
- Poor capital allocation decisions by management
- Integration challenges with MTEX acquisition
- Potential legal issues with seller of MTEX due to inconsistent information
- Reliance on recovery in narrowbody aircraft production
Other Key Points
- Possible legal remedies being sought from MTEX seller over inconsistent information
- Atai Capital prepared to voice concerns more openly if further poor capital allocation occurs
- Significant organizational restructuring of MTEX following acquisition
- Change in MTEX’s operational approach from independent to closely integrated
