Sidoti & Company, LLC Member FINRA & SIPC Required disclosures appear in the Appendix.

Transcription

1 Member FINRA & SIPC Required disclosures appear in the Appendix. 122 East 42 nd Street New York, NY (212) (212) AAON, Inc. (AAON-$26.55) Morning Meeting Note NEUTRAL Earnings Preview Target: $25 Joseph Mondillo (212) April 12, 2016 Market Cap (Mil) $1,435 Avg. Daily Trading Volume 176,000 Shares Out (Mil) Float Shares (Mil) Institutional Holdings / Analysts Covering 52% / 3 Dividend / Dividend Yield $0.17 / 0.6% Free Cash Flow Per Share (2017E) $ E 2017E OLD NEW OLD NEW Mar. $0.16 $0.15 $0.19 $0.21 June Sep Dec EPS $0.83 $0.84 $0.97 $1.11 P/E 27.4x 23.9x EBITDA $83.3 $83.0 $95.7 $107.4 in millions EV / EBITDA 14.6x 13.0x Price to Book Value 4.1x Return on Equity (2017E) 24.6% Total Debt to Total Capital Nil 5-Year EPS Growth Rate Projection 20% 52-Week Range (NASDAQ) Net Cash Per Share (2017E) $1.02 Short Interest (Mil) / Russell / 1094 Action Date Px Rating PT PT 8/8/ PT 1/3/ Rating 4/24/ Buy 23 PT 4/24/ PT 5/5/ Rating 2/6/ Neutral 25 PT 8/6/ PT 10/19/ PT 12/17/ PT 2/25/ Note: 2014 excludes one-time items of $ , 2015E, 2016E and 2017E include stock-based compensation expense of $0.04, $0.05, $0.05 and $0.06, respectively. Sum of quarterly EPS may not equal full-year total due to rounding and/or change in share count. The Russell 2000 Index includes AAON. NC=Not covered by. Year E 2017E Rev.(Mil.) $280.0 $245.3 $244.6 $266.2 $303.1 $321.1 $356.3 $352.1 $386.4 $417.3 GAAP EPS $0.47 $0.49 $0.38 $0.25 $0.49 $0.68 $0.80 $0.84 $0.97 $1.11 Description: AAON, Inc. ( is a leading domestic manufacturer of standard and custom heating, ventilating and air conditioning (HVAC) units, including unitary rooftops, chillers, air-handling units, make-up air units, heat recovery units, condensing units, coils and boilers. Products target the nonresidential market, specifically planned replacement (55%) and new construction (45%). AAON generates almost all of its revenue from the U.S. Headquarters are in Tulsa, OK. Release Date Conference Call Time (Eastern) Contact Co. Guidance Consensus May 10 May 10 4:15 p.m. TBA N/A $0.19 We Think An Acceleration Of Earnings Growth Thanks To Robust Nonresidential Construction Activity And Internal Initiatives Is Priced Into The Shares; Maintain NEUTRAL, $25 Target Our forecasts of 6% sales growth to $81.4 million and a 21% EPS increase to $0.19 for 1Q:16 versus 1Q:15 reflect strong growth in the nonresidential market and a positive impact from AAON s sales and marketing initiative. We project EPS growth will accelerate to a two-year CAGR of 15% in from a 1% increase in Our estimates assume sales growth of 8% per year and an incremental margin of about 40%. We expect AAON s new venture into the water source heat pump market to be a significant contributor to growth that we estimate could add $100 million and $0.30 of incremental sales and EPS, respectively, by We note that our estimates for 1Q:16 are in line with the consensus, yet the stock trades at 28x forward EPS and its EV is 15x forward EBITDA, both premiums to peer Lennox International (NYSE: LII, NC) and the S&P 600. We maintain our NEUTRAL rating and $25 target. Our target is 22x our 2017 EPS estimate, or 12x our 2017 EBITDA estimate plus net cash of $38 million. Our valuation implies premium forward multiples of 25.8x and 13.7x. AAON will report its 1Q:16 results on May 10 th and host a conference call after the close. We anticipate growth in the nonresidential sector... In our view, the U.S. nonresidential construction market is in the midst of an upswing that is spurring price increases. According to the Commerce Department s monthly data, spending on nonresidential construction has been growing at an average year over year rate of 10%. Data released for this year thus far showed increases of 12% in January and 10% in February. Furthermore, the Architectural Billings Index reported a sequential increase to 50.3 in February 2016 from 49.6 in January to confirm that architectural billings are stable to growing. Copyright 2016

2 Therefore, from an end-market perspective, we expect construction demand (about 50% of AAON s annual sales) to drive most of AAON s sales growth. We anticipate new construction revenue will grow in the mid-to-high single digits and replacement revenue in the low single digits. The rest of the growth will be from share gains, as we see it. and internal initiatives that include increased spending on sales and marketing The most immediate impact on sales and earnings, in our view, will be from the sales and marketing initiative, which saw the company increase the number of its regional sales managers from four to seven, which gave management better oversight of its 60 independent sales rep firms. The better sales oversight triggered the replacement of some underperforming sales rep firms in certain regions with higher quality sales reps. In fact, the transition of a portion of the sales reps contributed to underperformance in 2Q:15 and 3Q:15 and set the company up for relatively easy year over year comparisons for much of The new sales rep firms also employee more sales rep individuals, so more people will be actually selling AAON s products in the field. Overall, we think this will help AAON get back on track at taking share in and a new venture in the water source heat pump (WSHP) market. Prior to the new venture, AAON had a 2% share of the $500 million water source heat pump market. We estimate that given its current product offerings, the company does not compete in about 90% of this market. This will change in 2016, as the company plans to introduce its new vertical and horizontal WSHPs. By management s calculation, the market is attractive for AAON considering the leading player LSB Industries (NYSE: LXU, BUY), which has a 30% share, is focused on its chemical business and is financially distressed. According to AAON s management team, about 20% of the market can be had fairly quickly. We estimate that by 2017, the company could be generating $30-$50 million of WSHP revenue and contributing up to $0.10 to EPS (assumes 20% gross margin). By 2019, we think AAON could see $100 million of WSHP revenue and its contribution to EPS could be as much as $0.30 (assumes 30% gross margins). We do not model in a significant contribution in 2016 or AAON will be introducing its new products to this market in 2H:16. If AAON continues to grow earnings organically at the 15% annual growth rate that we estimate for and WSHP contributes an incremental $0.30, then the stock trades at what looks like a fully valued 15x implied 2019 EPS. We maintain our NEUTRAL rating and $25 price target. AAON s shares trade at 28x and 15x our respective forward EPS and EBITDA estimates, which are both premiums to the respective 10-year average multiples of 22x and 10x. AAON s peer Lennox International trades at 21x forward EPS and 12x forward EBITDA and the S&P 600 is currently at 18x and 9x, respectively. On a peer comparison basis, we suggest investors look at EV/EBITDA multiples due to the higher amount of non-cash amortization expenses related to goodwill that Lennox realizes. We derive our $25 target by applying a multiple of 22x to our 2017 EPS estimate of $1.11. Our target equates to a multiple of 12x our 2017 EBITDA estimate of $107 million plus net cash of $38 million. Although Lennox is a much larger company than AAON with more market share and a strong management team, we think that AAON s specialization in larger tonnage, higher-margin equipment justifies a premium multiple. We forecast 1Q:16 EPS in line with consensus, which is expected to be reported on May 10 th. As shown in Exhibit 1, we estimate quarterly revenue and EPS of $81 million and $0.19, respectively, compared to the consensus of $82 million and $0.19. Exhibit 1: AAON, Inc. 1Q:16 Preview 1Q:16 Estimate 1Q:15 Actual YoY Change Revenue (thou.) $81,374 $76, % Gross profit 24,005 21, % Profit margin 29.5% 28.4% Operating income 15,990 13, % Profit margin 19.7% 17.6% Adjusted net income $10,080 $8, % Profit margin 12.4% 10.9% Adjusted EPS $0.19 $ % Source: Sidoti & Co., and Company reports Key Risks Construction does not improve Steel and copper prices rise U.S. recession 2

3 Table 1. AAON, Inc. Income Statement (in thousands, except where noted) MarA JunA SepA DecA 2014 MarA JunA SepA DecA 2015 MarE JunE SepE DecE 2016E MarE JunE SepE DecE 2017E Sales, net $76,367 $92,310 $102,917 $84,728 $356,322 $76,768 $90,275 $94,360 $97,229 $358,632 $81,374 $100,205 $106,627 $98,201 $386,407 $87,884 $108,222 $115,157 $106,057 $417,320 Cost of sales 54,521 64,434 69,567 59, ,059 54,970 63,158 64,175 67, ,951 57,369 67,839 71,866 67, ,931 61,519 72,833 77,040 72, ,147 Gross profit 21,846 27,876 33,350 25, ,263 21,798 27,117 30,185 29, ,681 24,005 32,366 34,760 30, ,476 26,365 35,388 38,117 33, ,173 SG&A 7,629 10,584 13,830 8,519 40,562 8,317 9,200 10,062 9,859 37,438 8,015 9,419 10,876 9,918 38,229 8,349 9,524 11,055 9,810 38,738 Other (24) (281) (305) 5 (30) (34) (59) 0 0 Operating income 14,241 17,292 19,520 16,953 68,006 13,476 17,947 20,157 19,722 71,302 15,990 22,947 23,884 20,426 83,247 18,016 25,865 27,062 23,492 94,435 Operating income (ex. one-time items) 14,241 18,292 22,520 16,672 71,725 13,476 17,947 20,157 19,722 71,302 15,990 22,947 23,884 20,426 83,247 18,016 25,865 27,062 23,492 94,435 Interest expense (69) (71) (55) (81) (276) (44) (29) (14) (74) (161) (20) (20) (15) (15) (70) (15) (15) (15) (15) (60) Other (income) expense 21 (34) (27) Income before income taxes 14,289 17,397 19,532 17,028 68,246 13,445 18,003 20,113 19,778 71,339 16,000 22,957 23,889 20,431 83,277 18,021 25,870 27,067 23,497 94,455 Income tax provision 4,467 6,034 7,092 6,495 24,088 5,046 6,873 6,862 6,830 25,611 5,920 8,494 8,839 7,559 30,813 6,668 9,572 10,015 8,694 34,948 Net Income $9,822 $11,363 $12,440 $10,533 $44,158 $8,399 $11,130 $13,251 $12,948 $45,728 $10,080 $14,463 $15,050 $12,871 $52,465 $11,353 $16,298 $17,052 $14,803 $59,507 Net Income (ex. one-time items) $9,145 $12,016 $14,360 $10,353 $45,874 $8,399 $11,130 $13,251 $12,948 $45,728 $10,080 $14,463 $15,050 $12,871 $52,465 $11,353 $16,298 $17,052 $14,803 $59,507 GAAP Diluted EPS $0.18 $0.20 $0.22 $0.19 $0.80 $0.15 $0.20 $0.24 $0.24 $0.84 $0.19 $0.27 $0.28 $0.24 $0.97 $0.21 $0.30 $0.32 $0.28 $1.11 Diluted EPS $0.16 $0.22 $0.26 $0.19 $0.83 $0.15 $0.20 $0.24 $0.24 $0.84 $0.19 $0.27 $0.28 $0.24 $0.97 $0.21 $0.30 $0.32 $0.28 $1.11 Diluted shares outstanding 55,613 55,568 55,484 54,816 55,370 54,640 54,670 54,580 54,036 54,481 54,036 53,940 53,836 53,736 53,887 53,616 53,496 53,376 53,256 53, % -1.61% -1.09% -0.84% YOY Growth: Revenue 14.3% 1.2% 14.7% 15.5% 11.0% 0.5% -2.2% -8.3% 14.8% 0.6% 6.0% 11.0% 13.0% 1.0% 7.7% 8.0% 8.0% 8.0% 8.0% 8.0% Cost of sales 5.8% 1.4% 10.3% 11.9% 7.2% 0.8% -2.0% -7.8% 13.6% 0.8% 4.4% 7.4% 12.0% 0.3% 6.0% 7.2% 7.4% 7.2% 7.2% 7.3% SG&A 9.5% 16.4% 42.8% 3.3% 19.3% 9.0% -13.1% -27.2% 15.7% -7.7% -3.6% 2.4% 8.1% 0.6% 2.1% 4.2% 1.1% 1.6% -1.1% 1.3% Gross profit 42.7% 0.7% 25.3% 24.8% 20.6% -0.2% -2.7% -9.5% 17.4% 0.4% 10.1% 19.4% 15.2% 2.6% 11.8% 9.8% 9.3% 9.7% 9.7% 9.6% Operating income 70.8% -7.3% 15.3% 42.3% 21.8% -5.4% 3.8% 3.3% 16.3% 4.8% 18.7% 27.9% 18.5% 3.6% 16.8% 12.7% 12.7% 13.3% 15.0% 13.4% Net income 37.6% -6.2% 18.2% 35.6% 22.8% -14.5% -2.1% 6.5% 22.9% -0.3% 20.0% 29.9% 13.6% -0.6% 14.7% 12.6% 12.7% 13.3% 15.0% 13.4% Diluted EPS 63.7% -0.6% 36.6% 37.7% 28.5% -6.5% -5.9% -6.2% 24.7% 0.9% 21.4% 31.7% 15.1% 0.0% 16.0% 13.5% 13.6% 14.3% 16.0% 14.4% Margin Analysis: COGS/sales 71.4% 69.8% 67.6% 70.3% 69.6% 71.6% 70.0% 68.0% 69.6% 69.7% 70.5% 67.7% 67.4% 69.1% 68.6% 70.0% 67.3% 66.9% 68.6% 68.1% SG&A/sales 10.0% 10.4% 13.4% 10.1% 11.4% 10.8% 10.2% 10.7% 10.1% 10.4% 9.9% 9.4% 10.2% 10.1% 9.9% 9.5% 8.8% 9.6% 9.3% 9.3% Gross profit margin 28.6% 30.2% 32.4% 29.7% 30.4% 28.4% 30.0% 32.0% 30.4% 30.3% 29.5% 32.3% 32.6% 30.9% 31.4% 30.0% 32.7% 33.1% 31.4% 31.9% Operating margin (ex. one-time items) 18.6% 19.8% 21.9% 20.0% 19.1% 17.6% 19.9% 21.4% 20.3% 19.9% 19.7% 22.9% 22.4% 20.8% 21.5% 20.5% 23.9% 23.5% 22.2% 22.6% Pretax margin 18.7% 18.8% 19.0% 20.1% 19.2% 17.5% 19.9% 21.3% 20.3% 19.9% 19.7% 22.9% 22.4% 20.8% 21.6% 20.5% 23.9% 23.5% 22.2% 22.6% Net margin 12.9% 12.3% 12.1% 12.4% 12.4% 10.9% 12.3% 14.0% 13.3% 12.8% 12.4% 14.4% 14.1% 13.1% 13.6% 12.9% 15.1% 14.8% 14.0% 14.3% Tax rate 31.3% 34.7% 36.3% 38.1% 35.3% 37.5% 38.2% 34.1% 34.5% 35.9% 37.0% 37.0% 37.0% 37.0% 37.0% 37.0% 37.0% 37.0% 37.0% 37.0% Source: and company reports 3

4 Table 2. AAON, Inc. Cash Flow Statement (in thousands, except where noted) E 2017E Cash flows from operating activities Net income $44,158 $45,728 $52,465 $59,507 Depreciation 11,553 11,741 12,500 13,000 Amortization of bond premiums Provision for losses on account receivable (22) (48) Provision for excess and obsolete inventories (Gain)/loss on disposition of assets (305) (59) Share-based compensation 2,178 2,891 2,950 3,350 Excess tax benefits from stock options exercised (1,239) (2,445) Deferred income taxes (2,111) 1,172 Other Change in assets and liabilities (2,794) (6,623) (7,261) (7,401) Net cash provided by operating activities 52,279 52,910 60,654 68,456 Cash flows from investing activities Other 0 0 Investment in certificates of deposit and other 9,779 (2,546) Capital expenditures (16,127) (20,967) (39,000) (24,000) Net cash provided by investing activities (6,029) (23,194) (39,000) (24,000) Cash flows from financing activites Exercise of stock options 1,318 2,795 Excess tax benefits from stock options exercised 1,239 2,445 Repurchase of common stock (29,284) (37,143) (7,500) (12,000) Cash dividends paid to stockholders (9,656) (11,857) (13,984) (15,995) Net cash provided by (used in) financing activities (36,383) (43,760) (21,484) (27,995) Net change in cash 9,867 (14,044) ,461 Cash, beginning of period 12,085 21,952 7,908 8,078 Cash, ending of period $21,952 $7,908 $8,078 $24,539 Free cash flow 36,152 31,943 21,654 44,456 FCF per share $0.65 $0.59 $0.40 $0.83 Source: and company reports 4

5 Table 3. AAON, Inc. Balance Sheet (in thousands, except where noted) E 2017E Assets Current assets: Cash 21,952 7,908 8,078 24,539 Short-term securities 18,070 22,524 22,524 22,524 Accounts receivable 44,092 50,024 56,171 62,786 Income tax receivable 2,569 4,702 4,702 4,702 Note receivable Inventories 37,618 38,499 41,126 44,094 Prepaid expenses Deferred income tax 6, Total current assets 131, , , ,092 Property, plant and equipment, net 91, , , ,252 Long-term securities 10,112 7,580 7,580 7,580 Total assets 233, , , ,924 Liabilities and stockholders' equity Current liabilities: Accounts payable 11,370 6,178 6,786 8,003 Accrued liabilities 31,343 37,235 38,000 38,997 Total current liabilities 42,713 43,413 44,786 47,000 Deferred tax liabilities 13,677 8,706 8,706 8,706 Other long-term liabilities 2,668 1,817 1,817 1,817 Total stockholders' equity 174, , , ,401 Total liabilities and stockholders' equity 233, , , ,924 Key Financial Ratios: Long-term debt/total capital 1.5% 1.0% 0.9% 0.8% Book value/share $3.14 $3.26 $3.52 $4.35 Profit Margin 12.1% 12.3% 12.4% 13.6% Asset Turnover Leverage Net cash/share $0.91 $0.70 $0.71 $1.02 Days' sales outstanding Inventory turnover Return on equity (ROE) 28.6% 26.8% 25.3% 24.6% Return on assets (ROA) 18.8% 22.2% 21.4% 21.9% Return on total capital (ROTC) 33.3% 36.3% 33.0% 32.6% Source: and company reports 5

6 Appendix Required Disclosures AAON, Inc. (AAON-$26.55) NEUTRAL Target: $25 April 12, 2016 Action Date Px Rating PT PT 8/8/ PT 1/3/ Rating 4/24/ Buy 23 PT 4/24/ PT 5/5/ Rating 2/6/ Neutral 25 PT 8/6/ PT 10/19/ PT 12/17/ PT 2/25/ Key Risks Construction does not improve Steel and copper prices rise U.S. recession Valuation: We maintain our NEUTRAL rating and $25 price target. AAON s shares trade at 28x and 15x our respective forward EPS and EBITDA estimates, which are both premiums to the respective 10-year average multiples of 22x and 10x. AAON s peer Lennox International trades at 21x forward EPS and 12x forward EBITDA and the S&P 600 is currently at 18x and 9x, respectively. On a peer comparison basis, we suggest investors look at EV/EBITDA multiples due to the higher amount of non-cash amortization expenses related to goodwill that Lennox realizes. We derive our $25 target by applying a multiple of 22x to our 2017 EPS estimate of $1.11. Our target equates to a multiple of 12x our 2017 EBITDA estimate of $107 million plus net cash of $38 million. Although Lennox is a much larger company than AAON with more market share and a strong management team, we think that AAON s specialization in larger tonnage, higher-margin equipment justifies a premium multiple. Required Disclosures The (Sidoti) Equity Research rating system consists of BUY and NEUTRAL recommendations. BUY suggests capital appreciation of at least 25% from initiation of coverage over the next 12 months, while NEUTRAL denotes that a stock is not likely to provide similar gains over a 12-month period. As of 04/12/16, Sidoti provides research on 280 companies, of which 211 (75%) are rated BUY and 69 (25%) are rated NEUTRAL. Of the BUYS, Sidoti has received investment banking income from 1 company (0.47%). Of the NEUTRALS, Sidoti has received investment banking income from 1 company (1.45%). Of the NEUTRALS, 31 trade above our price targets. A risk to our price target is that the analyst s estimates or forecasts may not be met. This report contains forward-looking statements, which involve risks and uncertainties. Actual results may differ significantly from such forward-looking statements. Factors that may cause such a difference include, but are not limited to, those discussed in the Risk Factors section in the SEC filings available in electronic format through SEC Edgar filings at The research analyst certifies that this report accurately reflects his/her personal views about the subject securities and issuers and that none of the research analyst's compensation was, is or will be directly or indirectly related to the analyst's specific recommendations or views contained in this research report. Sidoti research analysts seek to have management of their covered companies meet with investors during non-deal road shows. Analysts compensation may be related to their success in scheduling non-deal road shows. Sidoti research analysts generally do not cover (or continue to cover) those companies that limit access to their senior executives by not participating in Sidoti-sponsored conferences and non-deal roadshows. A possible effect of this view may be that continued coverage decisions are made, in part, based on the willingness of management of covered companies to participate in such meetings. This approach could be viewed as presenting potential conflicts of interest. Sidoti does NOT own securities of the issues described herein. Sidoti policy does not allow an analyst or a member of their household to own shares in any company that he/she covers. Sidoti policy does not allow employees or household members to serve as an officer or director of a covered company. Sidoti does not make a market in any securities. Sidoti has non-research employees that will seek compensation for investment banking services from this company and trading revenue in connection with trading the securities of this company. Investment banking services, as defined under FINRA Rule 2241, includes, among other things, acting as an underwriter in or as a member of the selling group in a securities underwriting. Sidoti s role in any investment banking transaction can be viewed on this company s filings at Sidoti employees, including research analysts, receive compensation that is based in part upon the overall performance of the firm, including revenues generated by Sidoti s 6

7 Appendix Continued investment banking and brokerage activities, but compensation is not directly related to investment banking or brokerage revenues. Sidoti acted as an agent and received non-investment banking securities-related income from AAON. Other Disclosures This report is for information purposes only and is not intended as an offer to sell or a solicitation to buy securities. Sidoti does not maintain a predetermined schedule for publication of research and will not necessarily update this report. The stock rating on this report reflects the analyst s recommendation based on a 12 month period. Information contained herein is based on sources we believe to be reliable but we do not guarantee their accuracy. Prices and opinions concerning the composition of market sectors included in this report reflect the judgments as of this date and are subject to change without notice. It should be presumed that the analyst who authored this report has had discussions with the subject company to ensure factual accuracy prior to publication. This report was prepared for market professionals and institutional investor customers. Market professionals and institutional investors should consider this report as only a single factor in making their investment decisions. This research report is not a substitute for the exercise of your independent judgment. At times, Sidoti may be in possession of material non-public information, none of which is used in the preparation of our research. Sidoti maintains and enforces written policies and procedures reasonably designed to prevent any controlling persons, officers (or persons performing similar functions), or employees of Sidoti from influencing the activities of research analysts and the content of research reports prepared by the research analyst. Reprints of reports are prohibited without permission. Additional information is available upon request. 7