CSWI - CSW Industrials: Going Strong But Not A Buy Right Now

2023-06-09 14:09:57 ET

Summary

• CSW Industrials recently posted strong Q4 FY23 and FY23 financial results, with significant revenue growth across all three segments.
• The stock is currently overvalued, and its technical chart suggests a bearish trend reversal, making it a risky investment near its all-time high.
• Despite strong fundamentals and performance, it is advised to hold the stock for now due to potential risks and market volatility.
• I assign a hold rating on CSWI.

CSW Industrials ( CSWI ) works as a diversified industrial firm globally. They work in three segments: Specialized Reliability Solutions, Engineered Building Solutions, and Contractor Solutions. In the Specialized Reliability Solutions segment, they offer compounds, lubricant management products, and industrial maintenance and repair. In the Engineered Building Solutions segment, they provide fire and smoke protection solutions and architectural railings services. In the Contractor Solutions segment, they offer condensate pads, pumps, traps, diffusers, registers, thread sealants, refrigerant caps, electrical protection, and installation supplies. CSWI recently announced its Q4 FY23 and FY23 results. I will analyze its financial results in this report. I think they are currently overvalued; hence I assign a hold rating on CSWI.

Financial Analysis

CSWI recently posted its Q4 FY23 and FY23 results . The revenues for Q4 FY23 were $195.6 million, a rise of 12.9% compared to Q4 FY22. I believe due to a better pricing policy, the revenues from all three segments increased, which was the main reason behind its success. Now talking about its contractor solutions segment, the revenues increased by 11.2% in Q4 FY23 compared to Q4 FY22. Aside from the pricing policy, I believe the main reason behind the growth was HVAC/R and plumbing end markets sales. Now about the engineered building solutions segment, the revenues increased by 4.5% in Q4 FY23 compared to Q4 FY22. I believe commercial initiatives were one of the growth drivers in the segment. The revenues from the specialized reliability solutions grew by 25.1% in Q4 FY23 compared to Q4 FY22. I believe incremental sales volumes from its Shell-Whitmore joint venture and legacy Whitmore business was the main reason behind the growth in its specialized reliability solutions. The net income for Q4 FY23 was $27.1 million, a rise of 46.4% compared to Q4 FY22. I believe that improved operating expense margin when compared to Q4 FY22 and increased gross profit was the main reason behind the growth.

The revenues for FY23 were $757.9 million, a rise of 20.9% compared to FY22. I believe shoemaker, falcon, and AC guard acquisitions and better pricing actions were the main reason behind the revenue growth. The revenues from the contractor solutions segment grew by 23.4% in FY23 compared to FY22. I believe growth from the acquisitions was the main reason behind the rise. Now about the engineered building solutions segment, the revenues grew by 6.9% in FY23 compared to FY22. I believe retention of market share due to competitive lead times was the main reason behind the growth. The revenues from the specialized reliability solutions segment grew by 27.1% in FY23 compared to FY22. I think increased demand in all its end markets and improved operational execution were the main reason behind the growth in its specialized reliability solutions segment. The gross profit margin for FY23 was 41.9% which was 40.8% in FY22. I believe the rise was mainly attributable to better pricing actions and improved operating expense margin. The net income for FY23 was $96.5 million, a rise of 43.4% compared to FY22. I believe the financial results of CSWI have been excellent, and they tackled inflation with higher pricing, showing management's efficiency in performing under adverse conditions.

Technical Analysis

CSWI is trading at the $157 level. It tried to break the $144 level four times since 2021 and failed, but recently it broke out of its all-time high, which is a bullish sign. But if we look at the most recent candle formation, we can see that the stock has formed a gravestone doji candle, which is considered a bearish reversal candle and is not a good sign. So the recent breakout that the stock gave might be a fakeout. Looking at the price action, I would advise not to make any fresh positions in the stock as it might trap investors because the candle stick pattern is suggesting a reversal from current levels.

Should One Invest In CSWI?

They are on a significant growth trajectory and have boosted their revenue growth significantly in the last two financial years. Their revenues in FY22 increased by 49.4%, and revenues in FY23 increased by 21%, and we can see its effect on the company's share price. Their share price has appreciated by more than 60% since June 2022. They were able to successfully integrate the multiple acquisitions into their business, which also contributed to its growth in FY23. In addition, its adjusted EBITDA margin in FY23 was 23% compared to 21% in FY22. In FY23, its free cash flow was $107.5 million compared to $53.4 million in FY22. So their performance in FY23 has been excellent, and they have strong fundamentals and a balance sheet which is a positive sign and shows how solid the company is.

The shareholding pattern of CSWI also looks perfect. Institutions own 83.8% of the shares in CSWI. I believe institutions owning more than 60% of the stake in a company is a positive sign, and we see less volatility in share price fluctuations where institutions own a majority of the stake.

Now looking at its valuation. CSWI has a P/E ((FWD)) ratio of 23.7x compared to the sector ratio of 17.06x, and it has an EV / EBIT ((FWD)) ratio of 18x compared to the sector ratio of 15.11x. After looking at both ratios, I believe they are overvalued.

They have performed extremely well in the last two financial years, and they have got their benefits, with the stock appreciating more than 60% in the last one year. But its technical chart is alarming; the price action it has made suggests a trend reversal might be coming. In addition, the stock is near its all-time high, and I would not advise investing at such a high price; the current valuation also suggests that it is overvalued. So I would advise holding the stock for now.

Risk

Certain end markets they serve, such as HVAC/R, general industrial, construction, energy, rail transportation, and mining, have cyclical supply and demand balances, which present risks beyond their control and may impact their operating results. These markets may be facing overcapacity, distributor stocking practices, are highly competitive, and driven largely by end-use markets, which could all impact demand and pricing for its products and lead to unstable operating results and cash flows over its business cycle.

Their business operations and financial results may also be greatly impacted by changes in the cost of oil and petrochemicals and drilling activities, which are influenced by local, regional, and international events or circumstances that impact the supply and demand for the relevant commodity. It's possible that product demand won't be high enough to fully utilize present or upcoming capacity. On some products, excess industry capacity may continue to reduce volumes and profitability. As a result of industrial overcapacity, as well as rising energy and raw material prices, their operating performance may be unpredictable.

Bottom Line

CSWI is fundamentally strong and has performed consistently for the last two financial years. They look like long-term winners, but their current valuation seems high, and their technical chart suggests a bearish trend reversal. Hence, I assign a hold rating on CSWI.

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