Alstom (ALO-Euronext) - Buy at 30 Euros

Today's Enterprise Value approx. 13 Billion Euros ( approx. 3/4 of TTM Revenues, approx 9-10x free cash flow, 43 Euros share price)

Buy at 7- 8x Free Cash Flow - approx 30 Euros


Background:

Owners should recognize that Alstom is really a dull repair business obscured by the glamour of 300 kph Trains and Big Coal Power Plants. The latest numbers ( released today ) reflect this reality.

New orders are in free fall. Alstom didn't release much margin information today on new orders. Gudovac can speculate that the slope of actual margin destruction is not-quite-as-steep as new order intake. By actual margins, Gudovac does not mean at what estimated margins the latest orders were taken. Rather, Gudovac expects the latest order estimates to have been subject to heroic assumptions about improved learning curves, material costs, and engineering.

Owners can expect actual gross margins in the thermal power group for new equipment to turn negative in 20-36 months as these Hail Mary orders flow through Alstom's facilities. Margins on transport are likely to experience similar downward pressure but will get hurt less than power.

Grim, but this forecast is not causing Gudovac to abandon all hope - because the negative margin orders will be a smaller portion of Alstom's overall business in 20-36 months. It is a well known secret within the industry that Alstom's operating execution on new projects is matched only by Siemens Orlando (ie weak). In contrast, Alstom service is able to execute at the highest level in the industry. As far as Gudovac is concerned, the less emphasis placed on new equipment, the better for Alstom and its owners.

The value of Alstom is in its service and renewables segments. These 2 segments will continue to grow. Service will grow at perhaps double GDP. Renewables will grow at near double digits rates. Fortunately, when Alstom was near collapse, the service business recieved significant attention. A solid foundation has been created at Alstom in its service business - almost 20% of Alstom's employees work in Service. The service business has the advantage of high margins, low capital requirements, and relatively quick cycle times.

Alstom also has cleaned up it's balance sheet. The terrifying leverage of prior years has been addressed by management. Despite the lack of leverage, owners should expect that Alstom's dividend will be cut drastically.

Therefore, at reasonable prices, owners can expect reasonable returns from Alstom. Gudovac is able to justify a relatively higher than normal free cash flow multple (7-8x) for Alstom due to low leverage and service franchise.

Prospective Owners need to examine these questions:

Will the service business be able to carry the company ?
Will a 20% increase in Servce revenue at 17% margin fill the chasm when Traditional Power Margins drop to 0% ?
Will renewables expand at a double digit pace ?
Will Alstom stop all capacity expansion - as necessitated by the sea change in economic environment ?
Will Alstom be able to continue to off shore jobs given the European political climate ?

Finally, Alstom's managers could always do something truely destructive such as trying to make a big acquisition. Owners should apply a massive negative discount to Alstom if a big acquisition is even rumoured.

Don't get Massacred !

Gudovac1941@gmail.com