What happened
Shares of Albany International (AIN 0.42%) were down 7.6% as of 2:23 p.m. EST on Tuesday. On Monday, the company delivered a better-than-expected earnings report for the fourth quarter. The good news is that earnings beat the consensus analyst estimate. The bad news is that management's outlook came in lower than analysts expected.
Overall, the stock might have held up better today if it weren't for a high valuation. Here's what you need to know.
So what
The stock was trading at a price-to-earnings (P/E) ratio of 28 based on this year's earnings estimate entering the earnings report. That is at the higher end of Albany's trading range over the last few years.
Q4 net sales were up 15%, excluding currency changes, which looks good enough to support the stock's valuation. But higher net sales in the engineered composites segment, which generates a lower company-average gross margin, weighed on the company's profitability. As a result, adjusted earnings per share were $0.75, down from $0.86 in the year-ago quarter, which was below analysts' estimates.
On top of those numbers, management's outlook for the year ahead didn't offer enough growth to justify the valuation.
AIN PE Ratio (Forward) data by YCharts
Now what
Management sees solid demand in the near term, but investors were likely more disappointed with the earnings guidance. Revenue is expected to be between $1.01 billion to $1.05 billion, which is roughly flat with 2022. Adjusted earnings are expected to be $3.60, which puts the forward P/E at 28. That's a high price to pay for flattish growth.
Albany has a long record of allocating resources to markets that increase its margins. The company has a bright future serving promising new markets, such as manufacturing 3D composites for the aerospace industry, which is turning to lighter and stronger materials to save on energy costs.
But given the high-growth expectations implied in the current valuation, investors might want to wait for an acceleration in revenue growth before buying the stock.
