JPMorgan sees a rosy outlook for Atmas Filtration Technologies. The bank raised its rating on the air filtration company from neutral to overweight. Analyst Tami Zakaria raised her price target to $60 from $53, suggesting a 25% upside. The Zakaria upgrade comes after Atmas announced plans to acquire air filter manufacturer Koch Filters earlier this week. The acquisition will cost $450 million in cash and is expected to close in the first quarter of next year. “Overall, we have fine-tuned our expectations to reflect the latest currency expectations (excluding the pending Koch acquisition) and are increasing our Dec. 26 PT to $60 based on approximately 18x prior-year PE and approximately 13x prior-year EV/EBITDA,” he said. “Although this is approximately 2x below the current FY1 EV/EBITDA valuation of peer DCI (not covered), ATMU’s already strong E-E Given the BITDA margin profile, this valuation should continue to shrink.”Zakaria cited the “unlocking of valuations” that Atomas will receive as it diversifies its portfolio. “After the pending Koch acquisition announced earlier this week, commercial vehicle filtration will be about 88% of the revenue mix and industrial air filtration will be about 8% (compared to non-targeted peer DCI’s industrial air filtration revenue of about 14% and industrial “Koch filters have a shorter replacement cycle than the core ATMU portfolio (approximately 58% are replaced every 3-6 months) and 95% of their revenue is aftermarket,” she wrote. “Koch currently has 8% of its revenue related to data centers, and we believe DD% will increase over the foreseeable future.” Zakaria estimates that, assuming the acquisition is 70% debt-financed, Koch’s potential annual earnings per share accretion could be around 17 cents. The analyst added that Atmas’ core growth algorithm is also expected to accelerate following the deal. “Amid continued share appreciation, Koch/Industrial Filtration’s higher growth algorithm, additional M&A, and potential revenue synergies not incorporated in the currently announced synergy estimates, we believe ATMU’s core revenue growth algorithm has the potential to increase from MSD% to HSD% over the long term,” she said. Atomas Filtration stock is up 23% this year.
