JBI - Janus International: Cheap Valuations But Moderating Growth

2023-09-14 12:24:36 ET

Summary

• Janus International Group is expected to experience a moderation in growth due to supply chain conditions returning to normal and a decrease in conversion projects.
• After strong double-digit growth in FY21 and FY22, JBI's revenue growth has slowed recently, with 2Q23 seeing a 9.2% increase and 2H23 expected to see low to mid-single-digit growth.
• Margins have been strong due to volume leverage, pricing benefits, and favorable product mix, but may decrease in the medium to long term as the business mix reverts to normal.

Investment Thesis

Janus International Group ( JBI ) is expected to see a continued moderation in growth in the coming quarters. The company’s commercial business benefited from market share gain over the last couple of years as JBI was able to better manage supply chain conditions as compared to its peers and, as supply chain situation returns to normal, it might give away some of those gains. Similarly R3 business should see slowdown as idle brick and mortar retail capacity reduces, decreasing conversion projects. While new construction is doing well due to pent-up demand, this benefit should also go away after a couple of quarters. Further, margins should also normalize compared to last quarter levels as the company laps prior year price increases and sales mix returns to normalized levels. So, despite the cheap valuation, I have a neutral rating.

Revenue Analysis and Outlook

JBI has seen very strong double-digit growth in FY21 and FY22. However, of late, the company’s growth has started slowing.

In the second quarter of 2023, the company posted a 9.2% Y/Y increase in revenue to $270.6 million, primarily driven by strong performance within New Construction and R3 (Restore, Rebuild, and Replace) sales channel. The New Construction sales grew 33.9% Y/Y to $103.2 million, attributed to the carryover benefits from price increases implemented last year and pent-up demand. In the R3 channel, sales increased 7.6% Y/Y to $80.3 million, driven by the increase in conversions and expansions of retail spaces to self-storage capacity, coupled with the positive impacts of price increases. However, commercial and other sales declined 9.3% Y/Y to $270.6 million as a result of difficult year-over-year comparisons, given the favorable market growth in 2022 due to share gains in both the commercial steel roll-up door market and ASTA's rolling steel product line last year.

Looking forward, while the company should be able to continue posting organic growth in the coming quarters, the pace of growth should moderate as the market conditions normalize.

The company's sales benefited meaningfully from the pricing actions it has taken over the last couple of years in response to rising steel prices. The carryover benefit of these pricing actions continued to help the company's sales till last quarter but, as JBI anniversary those pricing increases in the coming quarter, this benefit should fade.

The company's R3 Segment (Restore, Rebuild, Replace) benefited a lot from conversion of retail spaces to storage space during the pandemic. This was fueled by a high amount of idle brick-and-mortar retail capacity during the pandemic. While the longer term trend around the decline in brick and mortar retail is expected to continue, the pace should be much slower compared to what we have seen in the recent years. So, R3 segment sales should continue to normalize.

The company's commercial sales also benefited during the last couple of years as JBI was able to manage supply chain disruptions better than its smaller peers and gain market share. However, with supply chain constraints easing and the company facing tough comps from the strong performance last year, the sales growth in this segment has turned negative. In the near term, I believe the company can give away some of the market share gain it has seen in the last couple of years which should adversely impact sales.

The company's new construction business is seeing good growth currently thanks to the catch-up spending by its customers due to permitting delays during the pandemic. So, this pent-up demand is helping the company's revenue for now. But I expect some normalization in new construction sales over the coming quarters, as the benefit from this pent-up demand goes away.

Management has given FY23 revenue guidance to be in the range of $1.07 bn to $1.09 bn for the current year, which implies 5.9% Y/Y increase at the mid-point. Given the company has posted over 9% Y/Y growth in the first two quarters, the implied growth rate for the second half according to the guidance is low to mid single digits.

So, while revenue growth is expected to continue, the pace of growth is expected to moderate meaningfully in the coming quarters.

Margin Analysis and Outlook

The company’s margin performance has been exceptional of late helped by volume leverage, pricing benefits, and mix.

In Q2 2023, the company saw an impressive 680 bps Y/Y improvement in the adjusted EBITDA margin to 27.3%, driven by favorable product mix, productivity initiatives, and price increases. These positives outweighed the inflationary increases in raw material, labor, and logistics costs.

Looking forward, while volume leverage should continue to benefit the margins given my expectation of continued (albeit moderating) growth, I see limited benefit from pricing moving forward as the company laps last year’s price increases in the coming quarter as explained in the revenue section. Further, Y/Y margin comps are also getting tough in 3Q.

Also, one thing which benefited the company last quarter is an increased mix of new-construction and R3 revenues which have higher margins compared to the commercial business. This helped the company post adjusted EBITDA margins above management's long term guidance range of 25% to 27%. In the medium term, once the benefit from pent up demand in the new construction business fades, and the sales mix reverts to normalized levels, margins should see some correction. So, while the company may continue to see benefits from the sales mix over the next couple of quarters, I see its adjusted EBITDA margins decreasing from the 2Q levels in the medium to long term.

Valuation and Conclusion

The company is trading at 11.18x FY23 consensus EPS estimates of $0.93. While the company’s valuation is not pricey, I believe slowing growth and a potential for business mix to revert to normalized levels in the medium term, which should negatively impact margins, is concerning. The company has seen rapid growth over the last couple of years benefiting from pandemic and price increases. The situation is quickly returning to normal and I believe the slowing growth and the potential for margin to correct from the last quarter levels should limit the upside for the stock. I don’t see much downside either given the low valuation. Hence, I have a neutral rating on JBI stock.

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