Advanced Energy Industries: Time To Take Profits After A Big Price Advance

In the spring of 2022, I saw hiccups in the advancement of Advanced Energy Industries, Inc. (NASDAQ:AEIS). The company has built up a solid track record and is well positioned from the continued electrification of the economy, although performance at the time was a bit soft. With the valuations looking largely fair, I was looking to initiate a position at the time, which I did later that summer.

With shares having seen 50% returns ever since, certainly in recent weeks, the Advanced Energy Industries, Inc. share price momentum outpaced the actual operating momentum, making this an opportune time to take profits.

Power Business

Advanced Energy provides precision power for the digital economy, being a manufacturer and developer of precision power conversion and control solutions, typically used in both high value and long life cycle applications.

This equipment is key to connect grid power to actual applications which run on power, such as semiconductor equipment, industrial and medical equipment, data center applications, among others.

At the time, the company claimed to operate in a $9 billion sellable addressable market, with dominant market positions translating into a $1.5 billion business which posted operating profits to the tune of $200 million a year.

Long term megatrends like 5G, AI and IoT were all set to drive demand for these products, as the company has employed a bolt-on dealmaking strategy on top of the sound positioning, to further grow the business. After forecasting earnings at around $6 per share in 2022, the company guided for earnings per share to double by the end of the 2020s, creating a steady roadmap for value creation.

Founded in the 1980s, the company has long been somewhat of a dormant stock, as a $20 share price in 2015 started rising as the acquisition strategy began. This fueled a rally to $100 per share later in the 2010s, with shares peaking at $120 in 2021, before falling to $77 in spring of 2022.

That decline in the share price coincided with somewhat mixed 2021 results, a year in which revenues rose by a mere 3% to $1.46 billion. This was the good news as serious margins pressure was seen with adjusted earnings of $183 million coming in at $4.78 per share, down nearly 10% from the year before. The 38 million shares trading at $77 worked down to a $2.9 billion equity valuation, including a $150 million net cash position which was equal to about $4 per share.

Trading at 16 times adjusted earnings, that looked very reasonable given a net cash position and given the long term positioning of the business. With first quarter results for 2022 being soft, the company was battling inflation and supply chain issues, which are valid reasons given the sign of the times, although it felt as if there were some execution issues as well. In the meantime, the company announced a $144 million deal for SL Power, a bolt-on deal which did not alter the investment thesis in any way.

Fortunately, I managed to initiate a modest position in the mid-seventies later in the summer 2022, as a re-rating have taken place ever since.

Revisiting The 2021 Highs

Shares of Advanced Energy Industries have seen a decent recovery, although it was still just an $85 stock In May, with shares having risen to $115 per share in recent weeks.

This came as inflationary pressures resulted in very strong 2022 results, a year in which revenues rose by 27% to $1.85 billion, with operating earnings increasing from $152 million to $233 million, and that is after a $26 million amortization charge. The company has seen strong growth in margins, with adjusted earnings reported at $6.49 per share, ahead of the $6 per share guidance seen for 2022 after a softer 2021. Net cash came in at $86 million after the acquisition of SL Power, as announced in 2022.

Despite the strong year, the company anticipated somewhat of a cooling down of the performance due to a correction in the semiconductor market. The company guided for first quarter sales at a midpoint of $415 million with adjusted earnings reported at $1.10 per share.

In May, the company posted first quarter sales at $425 million, ahead of the guidance and 7% ahead of the performance last year, as adjusted earnings of $1.24 per share came in ahead of the guidance as well. Despite the somewhat better-than-expected guidance, it was a second quarter outlook with $400 million in revenues and $1.00 in adjusted earnings per share which did not look too convincing.

Given this backdrop, it will be hard for Advanced Energy Industries, Inc. to replicate the 2022 guidance, or surpass it, as the 50% return in just over a year is quite solid. This means that if I work with a $5-$6 earnings per share number for this year, the company trades at 19-23 times earnings. The re-rating makes for an excellent time to take some profits here, which is exactly what I did in recent weeks, although unfortunately in the lower $100s already.