Alamo (ALG)

Specialized equipment manufacturer for infrastructure and vegetation management Alamo Group (NYSE:ALG) met Wall Street’s revenue expectations in Q1 CY2025, but sales fell by 8.1% year on year to $391 million. Its non-GAAP profit of $2.65 per share was 20.1% above analysts’ consensus estimates.

Company Overview

Expanding its markets through acquisitions since its founding, Alamo (NSYE:ALG) designs, manufactures, and services vegetation management and infrastructure maintenance equipment for governmental, industrial, and agricultural use.

Agricultural machinery companies are investing to develop and produce more precise machinery, automated systems, and connected equipment that collects analyzable data to help farmers and other customers improve yields and increase efficiency. On the other hand, agriculture is seasonal and natural disasters or bad weather can impact the entire industry. Additionally, macroeconomic factors such as commodity prices or changes in interest rates–which dictate the willingness of these companies or their customers to invest–can impact demand for agricultural machinery.

Alamo’s peers and competitors include Lindsay (NYSE:LNN) and AGCO (NYSE:AGCO)

Examining a company’s long-term performance can provide clues about its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Regrettably, Alamo’s sales grew at a mediocre 6.3% compounded annual growth rate over the last five years. This was below our standard for the industrials sector and is a rough starting point for our analysis.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Alamo’s recent performance shows its demand has slowed as its revenue was flat over the last two years.

This quarter, Alamo reported a rather uninspiring 8.1% year-on-year revenue decline to $391 million of revenue, in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 2.8% over the next 12 months. While this projection suggests its newer products and services will catalyze better top-line performance, it is still below the sector average.

All else equal, we prefer higher gross margins because they make it easier to generate more operating profits and indicate that a company commands pricing power by offering more differentiated products.

Alamo has bad unit economics for an industrials company, giving it less room to reinvest and develop new offerings. As you can see below, it averaged a 25.6% gross margin over the last five years. Said differently, Alamo had to pay a chunky $74.38 to its suppliers for every $100 in revenue.

In Q1, Alamo produced a 26.3% gross profit margin, in line with the same quarter last year. On a wider time horizon, Alamo’s full-year margin has been trending down over the past 12 months, decreasing by 1.3 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs (such as raw materials and manufacturing expenses).

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Alamo has managed its cost base well over the last five years. It demonstrated solid profitability for an industrials business, producing an average operating margin of 10.1%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.

Analyzing the trend in its profitability, Alamo’s operating margin rose by 1.6 percentage points over the last five years, as its sales growth gave it operating leverage.

This quarter, Alamo generated an operating profit margin of 11.4%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Alamo’s EPS grew at a solid 10.7% compounded annual growth rate over the last five years, higher than its 6.3% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

We can take a deeper look into Alamo’s earnings quality to better understand the drivers of its performance. As we mentioned earlier, Alamo’s operating margin was flat this quarter but expanded by 1.6 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For Alamo, EPS didn’t budge over the last two years, a regression from its five-year trend. We hope it can revert to earnings growth in the coming years.

In Q1, Alamo reported EPS at $2.65, down from $2.67 in the same quarter last year. Despite falling year on year, this print easily cleared analysts’ estimates. Over the next 12 months, Wall Street expects Alamo’s full-year EPS of $9.77 to grow 4.6%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Alamo has shown decent cash profitability, giving it some flexibility to reinvest or return capital to investors. The company’s free cash flow margin averaged 6.5% over the last five years, slightly better than the broader industrials sector.

Taking a step back, we can see that Alamo’s margin dropped by 4 percentage points during that time. If its declines continue, it could signal increasing investment needs and capital intensity.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Alamo’s management team makes decent investment decisions and generates value for shareholders. Its five-year average ROIC was 11.4%, slightly better than typical industrials business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. On average, Alamo’s ROIC increased by 3.7 percentage points annually over the last few years. This is a good sign, and we hope the company can keep improving.

We were impressed by how significantly Alamo blew past analysts’ EBITDA expectations this quarter. We were also glad its EPS outperformed Wall Street’s estimates. Zooming out, we think this quarter featured some important positives. The stock traded up 4.2% to $185.95 immediately following the results.

Updated: May 16, 2025 at 11:05 PM EDT

Before making an investment decision, investors should account for Alamo’s business fundamentals and valuation in addition to what happened in the latest quarter.

We see the value of companies helping their customers, but in the case of Alamo, we’re out. First off, its revenue growth was mediocre over the last five years, and analysts expect its demand to deteriorate over the next 12 months. And while its expanding operating margin shows the business has become more efficient, the downside is its projected EPS for the next year is lacking. On top of that, its gross margins are lower than its industrials peers.

Alamo’s P/E ratio based on the next 12 months is 19.9x. At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $217.50 on the company (compared to the current share price of $203.19).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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