Albany International - Investment Thesis

Executive Summary

Albany International is the leading provider of clothing within the paper machine clothing market and is essentially a de-leveraging story. Despite Albany holding roughly a 30% market share in the niche global PMC market, nearly double that of the next competitor, the market seems overly concerned with the company's balance sheet and values them at a slight discount to industry peers. I believe an opportunity exists to pick up the global market leader in the niche PMC market at a discount to its intrinsic valuation.

The key to this story is cash flow generation. Although I am usually quite cautious of investments with balance sheet risk, we are talking about a cash generative, global leader in the PMC market with industry leading margins. Albany's ability to generate free cash flow through cost reductions, an improved pricing environment and market share gains over the past year exemplify management's operational prowess and the company's superior product offering relative to peers. As nearly 80% of Albany's debt is due in 2015 or later, the company will be able to pay down its and will be able to be repaid via cash flow from operations over time. For instance, the company currently boasts of free cash flow yield of 9%, which boosts up to over 10% in 2012 and allows the company to not only reduce its net debt, but also sustain and grow their dividend in the short and medium-term.

Taking a look at Albany relative to industry peers, the company trades at a slight discount on P/E FY1 basis (5-10 discount). I suspect the market has valued Albany shares at a discount due to the company's balance sheet, but warrants a re-rating and a 20-30% premium to the market given the company's leading position in the PMC market and strong overall performance from the remainder of the portfolio companies, ADS in particular. Continued strong free cash flow generation and management's ability to demonstrate its ability and commitment to reducing long-term debt to acceptable levels in the upcoming quarters will be a critical catalyst for the re-rating of the shares. On this basis, a 15.5-17x FY1 PE for Albany would set a fair value range of $33-35 over the medium-term.

Company Description/Business Model

Albany International is a global advanced textiles and materials processing company. Their core business is the world's leading producer of custom-designed fabrics and belts essential to the production of paper and paperboard. Additional industries of business include: aerospace composites, nonwovens, building products, high-performance insulation and yarn.

Business segments

Paper Machine Clothing (PMC) - consist of solution-focused, custom-designed fabrics and belts that are critical for the formation and transport of the paper sheet through the paper machine. (Product useful life: Formation 45-60, Pressing 40-50, Drying 6-18 months)

Albany Engineered Composites (AEC) - is a leading supplier of advanced composite components and assemblies, as well as unique composite material intermediates, which provide differentiable value to customers (aerospace prime contractors and OEMs). Products include: fan case, landing gear brace components (Boeing 787), engine components (Rolls), lift fan (F35B), floor panel (Sikorsky). AEC has a n exclusive relationship with Safran and GE to produce components for jet engines.

Albany Door Systems - offers a variety of high-performance door products, expert installation, and responsive aftermarket services. Product line includes interior, exterior, and machine-protection doors, which are built to each customer's specifications. The main industries served are industrial production and logistics; food processing; pharmaceutical production; mining; warehousing and distribution; and in a wide range of process automation applications

Albany Engineered Fabrics (AEF) - weaves a wide variety of materials into superior mesh and needled structure, which are utilized in processes generally characterized as anything outside of papermaking, and designed for a wide range of end uses.

PrimaLoft - is the research and development leader in high-performance insulations and yarns (synthetic insulation), creating products that are the benchmark of performance in their categories.

Revenue & EBIT by segment (in $ millions)

Revenue EBIT

PMC $613 (67.1%) $260 (75.6%)

AEC $42 (4.6%) $-2.6 (-0.8%)

ADS $148 (16.3%) $50.4 (14.6%)

AEF $87 (9.6%) $29.5 (8.5%)

Primaloft $23 (2.5%) $12.8 (3.7%)

Unallocated $-5.8 (-1.7%)

Revenue by region

US $339 (37.1%)

Switzerland $226 (24.7%)

Germany $48 (5.3%)

Brazil $61 (6.7%)

Canada $43 (4.7%)

Australia $21 (2.4%)

Other countries $174 (19.1%)

Total $464

Industry Analysis (Porter's)

Bargaining power of suppliers

Low - Albany's largest input costs are synthetic fibers and polymer monofilaments (petroleum-based) for PMC

Bargaining power of customers

Medium - Albany's customers are typically large paper manufacturers that are purchasing bulk orders from Albany. Concurrently, Albany supplies customized solutions to each customer based off of the customers' building specifications and creates a long-term partnership

Threat of new entrants

Low - Although the paper production is projected to grow at a 3% CAGR globally over the next 5 years, production efficiencies have extended the useful life of PMC, effectively reducing the volume within the PMC industry. Combined with downward pressure on pricing, high-levels of capital required and technological expertise the PMC market should see continued consolidation within the industry.

Threat of substitutes

High - The increasing