Michael H/DigitalVision via Getty Images
The following segment was excerpted from this fund letter.
Alta Equipment Group (NYSE:ALTG) is another example of a company where my view appears to be quite different from the market’s view. I wrote about the company more extensively in the Q1 2024 letter, saying that:
“An investment thesis should fit into a paragraph, or in this case a sentence… This business is (1) less cyclical than it appears, (2) generates more cash than it appears, with (3) less debt than it appears, with (4) a significant hidden growing annuity type asset, and (5) run by an owner operator who can grow organically and through acquisition for the next decade-plus, at an (6) attractive valuation.”
Note that the paragraph above did not mention interest rates once. In fact, it speculated that ALTG was not particularly cyclical. Yet, just this month, at the first whiff of a possible interest rate cut, ALTG’s stock ripped 10% on the first day and then another 25%+ over the following few days.
Mr. Market appears to be tying ALTG’s prospects to interest rates. While lower rates will lower interest expense and may be beneficial to residential construction, Alta Equipment Group’s new equipment sales are primarily tied to infrastructure and manufacturing spending, not residential construction. Infrastructure spending should be supported by the Infrastructure Investment and Jobs Act (‘IIJA’), which allocates $1.2 trillion for transportation and infrastructure spending, and the Inflation Reduction Act (‘IRA’), which allocates $369 billion for fighting climate change and providing energy security. Mr. Market can focus on interest rates, but I see infrastructure spending as the more relevant driver of future earnings and that has already been passed by Congress.
To further bolster the case that Alta Equipment Group may be less cyclical than some believe, here is another piece of data that is not in the “historic” numbers. Alta Equipment Group went public in 2020. Thus, most historical financial datasets for the ALTG begin in 2020 even though the company has been operating for 40 years. In 2009, when Alta Equipment Group was primarily focused on forklifts and their strongest geography was Michigan, their two largest customers were auto manufacturers who entered bankruptcy as auto volumes plunged. During this period, the worst in 50+ years for their largest customers wading through bankruptcy, Alta’s Parts and Service business was down only 10%.
ALTG’s cash-generating power is another place where few people seem to see what I see. The financials are complicated because five distinct business lines are forced to be reported in a single cash flow statement under GAAP accounting rules. There are Parts businesses and Services businesses. These are very attractive higher margin “razor blade” businesses. There are also two lower margin (but higher transaction value) businesses selling new and previously rented equipment. These are the low margin “razor” of the traditional razor/razor blade business model. Finally, there is an equipment rental business. The rental business is opportunistic and profitable, but basically exists to eventually sell equipment for future Parts and Service business. Five symbiotic business lines, one set of financial statements, the rules are the rules.
Last year, ALTG’s rental business distorted its cash flow statement. Of its 40+ lines, two of them are explicitly related to the rental business – (1) proceeds from sale of rental equipment generated $128.9M, and (2) the expenditures for rental equipment used $62M. Looking at the cash flow statement, it appears that the rental business provided almost $67M of cash.
However, Alta Equipment Group typically takes rental equipment from inventory, so there is a supplemental schedule outside of the traditional cash flow statement. Quantitative investors are unlikely to adjust their numbers based on the schedule and passive investors don’t even know it exists. The schedule is labeled “Net transfer of assets from inventory to rental fleet within property and equipment” and the impact was $180M. When this number is factored in, the rental business consumed roughly $123M of cash last year. I believe, and management has indicated that 2023’s rental inventory investment included a ~$40M, one-time catch-up in inventory for the rental business, an anomalous holdover from inventory shortages during COVID.
The ALTG share price ended the quarter at $8, down 35% for the year. It is highly unlikely that the quants have connected the dots, and we know for certain that the passive investors don’t even look. I see well more than 100% upside from the quarter-ending share price, as we should all see the cash pile up in the coming quarters.
The fireside chat with CEO Ryan Greenawalt should provide insights into the stability of the business and how they can navigate economic weakness in their end markets. As one of the newest holdings, the video is meant to provide additional context.
|
Disclaimer: This document, which is being provided on a confidential basis, shall not constitute an offer to sell or the solicitation of any offer to buy which may only be made at the time a qualified offeree receives a confidential private placement memorandum (“PPM”), which contains important information (including investment objective, policies, risk factors, fees, tax implications, and relevant qualifications), and only in those jurisdictions where permitted by law. In the case of any inconsistency between the descriptions or terms in this document and the PPM, the PPM shall control. These securities shall not be offered or sold in any jurisdiction in which such offer, solicitation or sale would be unlawful until the requirements of the laws of such jurisdiction have been satisfied. This document is not intended for public use or distribution. While all the information prepared in this document is believed to be accurate, MVM Funds LLC (“MVM”), Greenhaven Road Capital Partners Fund GP LLC (“Partners GP”), and Greenhaven Road Special Opportunities GP LLC (“Opportunities GP”) (each a “relevant GP” and together, the “GPs”) make no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors, appearing in the document. An investment in the Fund/Partnership is speculative and involves a high degree of risk. Opportunities for withdrawal/redemption and transferability of interests are restricted, so investors may not have access to capital when it is needed. There is no secondary market for the interests, and none is expected to develop. The portfolio is under the sole investment authority of the general partner/investment manager. A portion of the underlying trades executed may take place on non-U.S. exchanges. Leverage may be employed in the portfolio, which can make investment performance volatile. An investor should not make an investment unless they are prepared to lose all or a substantial portion of their investment. The fees and expenses charged in connection with this investment may be higher than the fees and expenses of other investment alternatives and may offset profits. There is no guarantee that the investment objective will be achieved. Moreover, the past performance of the investment team should not be construed as an indicator of future performance. Any projections, market outlooks or estimates in this document are forward-looking statements and are based upon certain assumptions. Other events which were not taken into account may occur and may significantly affect the returns or performance of the Fund/Partnership. Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur. The enclosed material is confidential and not to be reproduced or redistributed in whole or in part without the prior written consent of the relevant GP. The information in this material is only current as of the date indicated, and may be superseded by subsequent market events or for other reasons. Statements concerning financial market trends are based on current market conditions, which will fluctuate. Any statements of opinion constitute only current opinions of the GPs, which are subject to change and which the GPs do not undertake to update. Due to, among other things, the volatile nature of the markets, and an investment in the Fund/Partnership may only be suitable for certain investors. Parties should independently investigate any investment strategy or manager, and should consult with qualified investment, legal, and tax professionals before making any investment. The Fund/Partnership are not registered under the Investment Company Act of 1940, as amended, in reliance on exemption(s) thereunder. Interests in each Fund/Partnership have not been registered under the U.S. Securities Act of 1933, as amended, or the securities laws of any state, and are being offered and sold in reliance on exemptions from the registration requirements of said Act and laws. The references to our largest positions and any positions listed in the Appendix are not based on performance. All of our positions will be available upon a reasonable request. All hyperlinks contained herein are not endorsements and we are not responsible for such links or the content therein. This version of the letter is modified from the original version sent to limited partners in July 2024. The following passage was removed “The reason I am boring you with a play-by-play of the ALTG cash flow statement and supplemental schedules is that, with 33.2M shares outstanding, this one-time investment in rental equipment, buried in a separate schedule, reduced cash by $1.20+ per share. If you value ALTG at 10X normalized free cash flow, the “missing” $1.20 per share of normalized free cash flow would equate to an extra $12 of share value.” Upon further diligence, the incremental inventory is reflected on the floorplan debt for rental equipment and only the equity portion would be reflected in cash. |
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
