Allient’s Data Center and Defense Momentum Is Raising the Stakes

Key Points

• Allient's second-quarter results showed record orders, margin expansion, and strong earnings growth driven by data center, defense, and industrial demand.
• Allient shares have surged more than 120% this year, pushing the stock well above most analysts' existing price targets.
• Rising valuation, slowing cash flow, and pulled-forward orders raise risks, making the upcoming third-quarter report a critical test for investors.

Allient Inc. NASDAQ: ALNT has long been the kind of company only an engineer would love.

The manufacturer, formerly known as Allied Motion Technologies, makes precision motors, drives, controls, and power-quality equipment that are hidden inside factory robots, surgical tools, military systems, and powersports vehicles.

Engineers are not its only fans anymore. Allient has become a player in three of the hottest themes in the market today: data center power, defense, and drones.

The challenge for Allient these days is that the stock has run past almost every analyst's price target. For investors, the question is whether the business is changing faster than Wall Street's models, or the stock has gotten ahead of itself.

Earnings Growth Sets a High Bar

Allient's second-quarter report on Aug. 5 set a high bar for its next earnings release, which is expected in early November. Revenue climbed 10% to $153.8 million, or 9% on an organic, constant-currency basis, topping the $145.7 million analysts expected. The stock jumped about 19% the next trading day.

Profits grew even faster than sales. Gross margin hit a record 34.9%, up 1.7 percentage points, and operating margin rose to 10.2% from 8.4%.

Net income jumped 85% to $10.4 million, or 61 cents per diluted share, versus 34 cents a year earlier. Adjusted earnings came in at 80 cents per share, well ahead of the 61-cent analyst consensus.

That makes the upcoming report an important test of whether the surge in orders, margin improvement, and data center demand carried into the second half of the year.

Record Orders Are the Bigger Story

The real headline in the report, though, was demand. Orders surged 49% to a record $201.3 million, giving Allient a book-to-bill ratio of 1.31, meaning it booked $1.31 in new business for every dollar it shipped. Backlog swelled to $298 million, most of which management expects to turn into revenue within three to nine months.

The growth is coming from the right places. Industrial sales rose 17%, aerospace and defense rose 16%, and medical rose 9%. The vehicle market fell 7%, however, due to weak powersports demand. Sales tied to data centers and infrastructure reached $16.3 million, or 10.6% of revenue, up 60% from a year earlier.

AI Infrastructure and Defense Are Becoming Bigger Growth Engines

In short, Allient has repositioned itself in markets that are growing faster than its old ones. In data centers, its Allient Power unit sells harmonic filters and related gear that keep the electricity feeding AI servers clean and stable.

Management says it has the highest-power active filter on the market and is finishing a capacity expansion due online late in the third quarter or early in the fourth.

Defense is the second engine. On Aug. 5, Allient launched a new propulsion controller designed to meet National Defense Authorization Act supply-chain rules for military drones. Then on Sept. 29, the company announced it had earned Cybersecurity Maturity Model Certification Level 2, which is valid for three years and strengthens its ability to compete for defense work involving sensitive information.

For investors who want growth stocks with real profits rather than promises, that’s an appealing mix. Income investors won’t be too impressed, though, even as the board raised the quarterly dividend payout 33% to 4 cents per share in May, a yield of only about 0.14%.

Analyst Targets Haven’t Kept Up With the Rally

Analysts are clearly supportive. With one Strong Buy rating, four Buy ratings, and a Hold, the consensus rating for Allient is a Buy.

Several analysts, however, have yet to issue new targets for the company, with many still carrying an $80 level set earlier this year, which apparently does not account for a nearly 35% rise in the stock price over the past three months.

Because of that, the 12-month consensus target price remains at $84, about 29% lower than its current trading price.

The most recent adjustment was from JPMorgan Chase NYSE: JPM, which boosted its target two days after recent earnings to $120 per share.

Since the start of the year, Allient shares are up more than 120%.

A Higher Valuation Leaves Less Room for Mistakes

Given the unknown duration of the boom that’s occurring in several of its important sectors, valuation is likely the most important risk. At roughly 43 times this year's expected earnings, Allient is priced like a high-growth tech company, not a maker of motors and filters growing sales at high single digits. Any slowdown in orders could hit the shares hard.

There are potentially also some quality-of-earnings questions. Management acknowledged that longer supply-chain lead times are pulling some customer orders forward by about three months, and operating cash flow fell to $20.1 million in the first half from $38.4 million a year earlier, as the company built inventory and waited on receivables.

There is also competition. AMETEK NYSE: AME and Parker-Hannifin NYSE: PH, among others, also fight in this space.

The Next Earnings Report Could Be the Real Test

The reality is that Allient is a more attractive company these days. Margins are at records, debt is falling, orders are piling up, and the company is well-positioned in data centers and defense.

Right now, the company does not appear as a true value stock, and at these levels, investors are paying up for future execution. That puts more weight on Allient's upcoming third-quarter report, when investors will get a fresh look at whether record order activity is translating into revenue, margins are holding near recent highs, and cash flow is beginning to catch up with earnings growth.

If those come in strong, for investors who want to buy stocks with exposure to AI infrastructure and defense spending, Allient provides an appeal that now goes well beyond the world of engineers.