Patrick Industries: Cash In – GuruFocus.com
Less valuable inventory has been available since the resumption of the Covid-19 pandemic took hold. Yet 161 of them currently have valuations low enough to pass GuruFocus’s Undervalued Predictable filter.
Most are banks or financial stocks, but there are a few in other categories. One of these is Patrick Industries Inc. (PATK, Financial), which describes itself in its 2020 annual report as “a leading manufacturer and distributor of components and building products and materials serving original equipment manufacturers (‘OEMs’) primarily in recreational vehicles (‘ RV “), The navy, prefabricated houses (” MH “) and industrial markets. “
This illustration is from a presentation by the company in November 2021 of its third quarter results, with year-over-year results shown in white circles. The improvements reflect renewed interest – and sales – in leisure products, as well as growth in new housing starts and renovations.
As an example of his business, the following slide shows the products that Patrick provides for the exterior of RVs:
Based in Elkhart, Indiana, Patrick has experienced organic and acquisition growth. In the presentation (published in November), the company indicated that it had made 23 acquisitions in the “Leisure Lifestyle” industry (RV and Marine) since 2018. In addition, it had added four acquisitions in Housing and Industrial segments.
In its third quarter post, the company issued an optimistic note for 2022. CEO Andy Nemeth wrote:
“Retailer demand for leisure lifestyle products remains high and has resulted in lower dealer inventories and increased OEM order books despite record production levels in the industry. At the same time, our sales in the housing and industrial markets continue to benefit from low dealer inventories, attractive financing rates and strong home improvement and renovation activity.
In its last annual report, the risks listed included:
- Covid-19, Patrick’s management having observed that the pandemic had had “a significant adverse effect on our business”.
- Economic conditions and cycles affect the RV, manufactured home, marine and industrial markets in which it operates. Or, to put it another way, today’s boom may be the prelude to a collapse in the future.
- A significant part of its activity is done with only two customers in the RV market; they represent 39% of consolidated sales in 2020. The loss of one or both customers could have a material adverse effect. Patrick does not have long term agreements with his clients.
- Credit terms, in two senses: First, end customers often need financing to purchase RVs, boats and manufactured homes; this means that sales would fall if interest rates were to rise significantly. Second, it needs a combination of cash flow and credit to fund its inventory and keep its acquisitions strategy active. As we will see in the Financial Strength section, the company is heavily in debt.
- The company’s articles of association and by-laws include what are called “poison pills”. In some cases, such measures can shield management to the detriment of shareholders.
Patrick noted in 10-K that its four markets are very competitive, mainly due to low barriers to entry. The competition includes both manufacturers (through vertical integration) and other component suppliers.
What is unique is that its competitors across multiple product lines compete on a regional and local basis, but not on a national basis. Additionally, he believes that any competitor who would like to challenge nationally should commit to significant capital and serious commitment to staff and facilities.
While there are no direct competitors nationwide, GuruFocus does offer a few publicly traded names that compete with each other in one way or another:
- Gibraltar Industries Inc. (OSCILLATE, Financial), which manufactures metal construction products.
- JELD-WEN Holding Inc. (JELD, Financial), a manufacturer of doors, windows and related products.
- Masonite International Corp. (GATE, Financial), a designer, manufacturer and distributor of doors.
Their comparative performance is presented below in the Performance section.
With a score of just 4 out of 10, you know there is probably some debt in the background. This graph, which compares cash and debt through the end of fiscal 2020, clearly shows:
Can Patrick afford to pay the interest and the principal? The interest coverage ratio tells us it’s possible, but there isn’t a lot of headroom. GuruFocus reports: “Ben Graham requires a company to have a minimum interest coverage of 5 with the companies in which he has invested. If the interest coverage is less than 2, the business is in debt. Any sluggish activity or recession can put the company in a situation where it cannot pay the interest on its debt.
Potential investors should obviously watch this ratio. The Altman Z-Score, which measures the possibility of bankruptcy, is 3.22 and falls in the “safe” zone, but again, barely (3.00 is the minimum for a safe score).
As long as the business can continue to earn more on its equity and borrowed capital than it pays, it should remain financially stable. As the table shows, the return on invested capital is 14.61%, more than three points above the weighted average cost of capital at 11.08%.
The company obtains an excellent profitability rating, driven by operating and net margins. Both exceed the median margins of the vehicle and parts industry.
The table also shows that Patrick holds a leading position in the industry when it comes to return on equity and return on assets. On the first metric, it shows an ROE greater than 95% of companies in the sector.
Across the growth lines, all rates are favorable, but note that EBITDA is greater than revenue, indicating that the company has become more efficient or effective in its business operations over the past three years.
The growth rate of earnings per share of 6.50% per year in recent years is respectable and should not obscure the performance of the company in other periods:
- Last 12 months: 152.90%.
- Last five years: 18.50% per year.
- Last 10 years: 42.20% per year.
As you would expect from a small, growth-oriented business, the dividend is unlikely to attract investors. Still, the dividend might have been significant if the stock price hadn’t risen so sharply over the past year and a half.
The dividend payout ratio is also low, which offers ample room for growth if the company slows down in acquisitions and capital spending.
Number of shares
Despite the ups and downs on this chart of outstanding stocks, the needle really hasn’t gone too far. The peak, set in December 2017, was 24.64 million shares, about 1.5 million more than the 23.09 million shares he currently owns.
As the following table shows, almost three quarters of its shares are owned by institutional investors.
Patrick has outperformed his peers, Gibraltar and JELD-WEN, over the past decade:
In past periods, it has posted the following annual returns:
- One year: 19.18%
- Three years: 38.11%
- Five years: 9.49%
- 10 years: 45.81%
To join the list of predictable dumpers, a business must have a safety margin calculated with the discounted cash flow process. A DCF calculation can be based on profit or free cash flow; in its analysis pages, GuruFocus indicates which of them is the most appropriate. For Patrick, he advocates the profit approach.
The degree of confidence in a DCF analysis depends on the predictability or consistency of the gains. Patrick was rated 4.5 out of 5, indicating that we can have reasonable confidence in the results (assuming we agree with the model’s default assumptions).
The analysis leads to a high safety margin:
Using the FCF approach, the calculator estimates the fair value at $ 254.49, which would mean a safety margin of 67.83%.
The price / earnings ratio and the PEG ratios, which are shown in the table, also indicate an undervaluation. Patrick’s price-to-earnings ratio stands at 9.45, well below the industry median of 17.
The PEG ratio stands at 0.39, well below the fair price of 1. The company has experienced a high EBITDA growth rate, averaging 24% per annum over the past five years (five years is the standard for calculating the PEG, while three years is indicated in the profitability table).
The investment experts tracked by GuruFocus have bought more than they sold over the past two years:
At the end of the third quarter of 2021, four gurus held shares in Patrick; the three largest farms were those of:
Chuck royce(Trades, Portfolio) ‘s Royce Investment Partners. She held 286,963 shares, representing 1.21% of Patrick’s outstanding shares and 0.18% of the company’s assets under management. During the quarter, it added 8.13%.
Jim simons(Trades, Portfolio) ‘Renaissance Technologies reduced its stake by 33.6% to end the quarter with 29,946 shares.
Paul tudor jones(Trades, Portfolio) of Tudor Investment Corp. opened a new position in the third quarter, buying 14,152 shares.
Predictable undervalued stocks have two key advantages. First, as the name suggests, they are dumped on the basis of DCF analysis; second, they posted predictable earnings growth.
These are two pillars on which a stock of value could be chosen. But value investors also want a third pillar: little or no debt. Patrick Industries fails on this metric, despite having his interest coverage (barely) adequate and his Altman Z-Score (barely) in the safe zone. Essentially, this rules out the business as a value proposition for all but aggressive value investors.
It can also be excluded as an income stock. The rapid increase in the share price over the past 10 months has put dividend income in the mirror.
Growth investors looking for small-cap candidates may want to take a closer look at Patrick. The company’s EBITDA and annual returns have been strong, and as long as the company uses debt for organic growth and acquisitions, growth is expected to be higher over the next five years.