TRG | The Bottom Line – 10/20

This week, TRG initiated coverage of Alta Equipment Group (ALTG), a franchised dealership selling Construction Equipment and Material Handling equipment used in non-res construction projects and in manufacturing/warehouses. The key brands represented include Hyster-Yale, Volvo, JCB, and Kubota. As a one-stop shop, Alta also provides parts and services (P&S) on equipment, as well as equipment rentals. The P&S is the gem of the business, as gross margins of ~45% are 3x the level of selling equipment (mid-teens GM) and provide steady recurring revenue for the years after selling equipment. Selling more equipment leads to a larger field population and more P&S sales in the coming years. We believe sales will be strong in the coming years for: 1) robust demand backdrop from re-shoring and federal funds supporting both non-res construction and manufacturing activity, 2) the OEMs are producing more equipment as the supply chain normalizes, all of which leads to greater P&S growth in the coming years. We believe EBITDA margins will expand from ~10% now by ~50 bps per annum due to: 1) aging and growing field population, 2) the Construction Equipment segment is less mature than the Material Handling segment, but is improving, and 3) recently acquired companies grow and leverage the cost base. Lastly, the dealership industry is extremely fragmented and OEMs have gated off PE from entering the space. We believe Alta will continue to do more deals at modest multiples, which could add meaningfully to our estimates. All in, we see a robust business model with a bright future that is nearly half off its prior high of ~$20/share in February.