Alstom

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 2/5

Alstom is a French multinational company primarily engaged in rail transport, offering a wide range of solutions from rolling stock to signaling and infrastructure.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview and Moat Assessment

Alstom operates primarily within the rail transport sector, offering solutions encompassing rolling stock (trains, trams, metros), signaling, and infrastructure (maintenance, refurbishment). They provide end-to-end solutions across various rail transit needs.

Revenue Distribution: Alstom’s revenue streams are primarily segmented across:

  • Rolling Stock: The design and manufacturing of trains, trams, and metro cars, contributing most significantly to revenue.
  • Services: Maintenance, modernization, and repair activities for rail equipment.
  • Signaling: Providing solutions for rail networks, including control systems and communication.
  • Systems & Infrastructure: The development and construction of rail infrastructure.

Geographically, Alstom has a strong presence in Europe but operates globally, with revenues spread out among its regions.

Industry Trends: The rail transport industry is influenced by several key trends:

  • Increasing urbanization and population growth spur demand for sustainable and efficient public transport.
  • Growing concerns about environmental impact drive demand for electrified and energy-efficient rail transportation.
  • Government investments in infrastructure provide an impetus for new projects.
  • Technological advancements in signaling and train control are shaping the future of the industry.
  • A growing trend toward services and aftermarket contributes to steady, predictable revenue.

Competitive Landscape: Alstom operates in a competitive market with major players like Siemens, Bombardier, and China’s CRRC.

  • Barriers to entry are high in this industry due to the significant capital investment and technology required.
  • Competition is intense, especially on price, which can pressure profit margins.
  • Reputation, relationships and proven track records are also important competitive factors.

What Makes Alstom Different?

  • End-to-End Solutions: Provides a diverse range of rail solutions, giving it a strategic advantage by catering to different needs.
  • Global Presence: Has a worldwide reach, allowing Alstom to diversify its revenue streams and exploit opportunities in various markets.
  • Technological Capability: With its focus on innovation, Alstom has a robust portfolio of tech advancements.
  • Long-Term Contracts: Secures long-term contracts for equipment and service provisions, which improves cash flow and gives visibility.

Moat Rating: 2/5

While Alstom has some competitive advantages that provide a narrow moat, it has vulnerabilities to technological disruption and is dependent on large, capital-intensive projects with inherent risks. As such, it receives a narrow moat rating.

  • Intangible Assets (Brand/Reputation): Alstom has a long history, but it’s not particularly known for pricing power like a luxury goods provider. The branding and reputation do offer some stickiness with customers and provide some advantage in bidding.
  • Switching Costs: Clients rely on Alstom’s after-market support and upgrades. A railway is very complex and switching to a new provider can be very costly.
  • Scale Economies: Although scale is important, the industry is more consolidated than what is typical for a wide moat.
  • Network Effects: Are not a major source of competitive advantage. While large projects could have some network effects, they are more likely a source of scale advantage.
  • Cost Advantages: There is a mix of both efficient production in Europe and lower-cost factories in emerging countries. Also has a strong service division. But many other companies are attempting to do the same, so its not an advantage over peers.

Financial Analysis

Historical Performance: Alstom has had a mixed financial history.

Recent years have been characterized by low profitability, debt, and difficulty in capturing full value of recent acquisitions and deals, which is a major concern for the company.

  • Revenue Growth: Growth has historically been highly variable because of the volatile nature of the industry.
  • Margins: Operating margins have been erratic and mostly low, and they have consistently failed to breach a 10% threshold in the past five years.
  • Profitability: Profitability is inconsistent, with periods of losses and lackluster returns.
  • Return on Capital: Has also been highly volatile, with no consistent history of returns above the cost of capital.

Recent Concerns/Controversies

  • Free Cash Flow: Alstom is struggling to convert profit to cash, and has consistently had a problem with negative FCF in the past few years. The business is very capital intensive, which contributes to the low/negative free cash flow.
  • Debt Burden: The company has a significant amount of debt. Rising rates coupled with inconsistent operational performance are a big challenge.
  • Low Profitability: The business is showing consistent inability to improve the overall profit margins of the business.
  • Management Turnover: The company has had frequent managerial changes, particularly in the CFO position, which creates a lot of concern.
  • Guidance and Contracts: The company has a habit of lowering guidance and having multiple setbacks in their contract business, raising questions about the quality of the company’s financial performance.

Balance Sheet Health: 2/5

Alstom has been taking on considerable debt, has relatively low liquidity and no cash buffer, which is a concern. Based on its negative free cash flow, high debt burden, and low cash balances, we are rating Alstom’s balance sheet as poor.

  • Debt: The company has high debt level, relative to equity and revenues, giving them very little financial flexibility.
  • Liquidity: The cash reserves are very low relative to short-term obligations and debt, creating concern about their liquidity profile.
  • Assets: Most of their assets are made of long term PP&E, which is difficult to leverage in times of need.

Understandability: 3 / 5

Alstom’s business model is moderately complex but easier to understand with proper analysis. Here’s why:

  • Industry Complexity: The industry has many complexities regarding large projects, regulations, and governmental approvals and subsidies, making it slightly complex.
  • Business Diversification: Alstom’s end-to-end solutions and geographical reach make it challenging to follow, due to the various elements that have to be tracked.
  • Financial Statements: Alstom’s reporting is quite standard but it’s imperative to separate and analyze different sectors of the business.
  • Competitive Environment: Competitors are easily identifiable and the competitive structure is clear, making it less of a difficulty.
  • Moat: Understanding the business drivers and the lack of major competitive advantages makes the business easier to analyze than that of a high-tech company.

Conclusion

Alstom is a company with some competitive advantages in the rail transportation sector and could benefit from the long-term trends, yet it faces significant risks because of its low margins, debt level, and lack of adequate free cash flow generation. Based on the latest earnings calls, the company seems to face challenges in improving profit margins and converting profits to cash, highlighting the ongoing operational challenges. Moreover, the frequent changes in management could further indicate a lack of a cohesive long-term strategy. These facts makes the business risky at the moment, with the potential to rebound if these issues are addressed. However, at current state, investment has low appeal for long-term holdings.