So while M&A was a big factor, driving almost 80% of the growth this quarter, organic growth was no slouch either at 38% year-over-year. Sequential growth was strong as well at 15% quarter-over-quarter, supported both organically and through M&A. Consistent organic growth is critical for any roll-up strategy. This proves the company is less dependent on external financing for growth. And any acquisition they do is immediately more valuable – because they’ve proven they can grow it. Now onto margins. Gross margin did decline year-over-year and sequentially. Much of that the company says is due to expanding product lines that carry an initial higher cost of sales. Once these new lines are established, we expect margins will bounce back as efficiencies are maximized – and of course they should bring higher sales as well. Now let’s talk about guidance. It was perhaps the only negative of the quarter. Here’s what management said last quarter: The Company’s revenue objective for 2019 is to reach an annualized revenue run rate of $40-50 million with an EBITDA margin of 10-15%. On a pro-forma basis, taking seasonality into account, management believes the acquisitions the Company has completed, the addition of new product lines and sales staff to specific regions, and the focus on improved costs, should enable those targets to be achievable, and now believes an EBITDA margin in the range of 15-20% may be achievable this year. And here’s what we got this quarter: The Company has adjusted its’ previously stated revenue objectives for 2019, with an adjusted goal of reaching an annualized revenue run rate of up to $40 million with an EBITDA margin of 10-15%. The net effect is lowered revenue guidance, down ~10% from the mid-point, and lowered EBITDA margins from the 15-20% upside range. The lower guidance as we understand is due to 2 factors: - Project timing – some revenues shifting from Q4 this year to Q1
- Project selection – we know management has turned down large projects that won’t deliver acceptable margins
Despite the lower guidance, we feel the story has strengthened and derisked that now AEP has proven they can: - Buy, grow and optimize acquisitions at attractive prices
- Expand product lines and grow organically
- Deliver consistent profitability
And besides as we’ve talked about before, the company’s valuation tells us the previous guidance wasn’t close to being priced into the stock. Bottom Line This is a management team that continues to execute. And the proof is in the numbers. Q2 this year was impressive. But one quarter is only a data point. Q3 is even better – and now we have a trend. And with that trend, we have greater confidence this company is going to be a winner – and should be trading higher than current levels. This one’s a buy for us under $0.60. Disclosure: Paul, Brandon, and Keith are long AEP.V
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