JBI - Janus International: Undervalued With Strong Future Growth Prospects

2023-11-30 19:47:36 ET

Summary

• JBI reported strong Q3 results, beating EPS estimates by 13.5% and experiencing a 40% YoY revenue growth in the new construction segment.
• The company's innovative security product line, including the Nok? Smart Entry systems, is expected to perform strongly in the coming quarters.
• JBI is trading at a discount compared to the sector median P/E and has solid growth potential, making it a good long-term investment.

Investment Thesis

Janus International Group, Inc. ( JBI ) is a self-storage and building solutions provider headquartered in Temple, Georgia. In this thesis, I will be analyzing its third-quarter results and its future growth prospects. I will also be looking at its valuation at current price levels. Since my last analysis of JBI, the stock price has remained flat, but the revenues and earnings have grown significantly. I believe the company is on the right growth track, and its innovative security product line is expected to perform strongly in the coming quarters. Considering these factors, I maintain a buy rating for JBI.

Company Overview

JBI is a leading producer and supplier of turn-key self-storage, swing and roll-up doors, relocatable storage units, and other industrial and commercial building solutions globally. Its business can be segregated into three business segments: new construction, commercial & other, and R3. The new construction contributed 37.6% of total revenues, followed by the commercial and other segment at 31.4% and R3 segment at 31%. JBI has a diversified product portfolio catering to multiple building solutions, from doors to security systems. Some of these products include self-storage roll-up doors, smart entry systems, mass-relocatable storage units, and commercial sheet doors.

Q3 FY23 Results

JBI reported strong third quarter results, beating the market EPS estimates by 13.5%. The revenue was in line with the market estimates. The new construction segment proved to be the outperformer for the company, experiencing a 40% y-o-y revenue growth. The company expects the revenue from its products in the new construction segment to continue this performance, given the increased market share in the security products. I believe the company’s investment in innovating its marquee security brand, Nok? Smart Entry systems, could prove to be a game changer as it is experiencing a consistently strong demand, and its products are of superior quality and have a technological edge.

Total revenue for the third quarter stood at $280 million, up 6.7% compared to $262.5 million in the same quarter last year. As per my analysis, a strong demand from the new construction segment significantly boosted the revenues. The new construction segment experienced a 40% increase in revenue, but the commercial & other and R3 segments witnessed a fall of 11% and 2%, respectively. The management commented that the strong base for both these segments in last year's third quarter resulted in this decline in revenues. However, I believe its increased focus on the new construction segment resulted in this fall. I do not think this fall is necessarily bad for the company as it expects the new construction to outperform in the coming quarters and more than offset the underperformance by the other two segments. It reported gross profit of $119.1 million, up 23% compared to $96.7 million in the corresponding quarter last year. The fall in the cost of goods sold from $144.7 million to $129.7 million y-o-y resulted in expanded gross profit margins. JBI reported diluted EPS of $0.25, up 14% compared to $0.22 in the same quarter last year.

Overall, the company posted solid quarterly results with improved profit margins. The management upgraded its FY23 revenue and adjusted EBITDA guidance to $1.08-1.09 billion and $280-$290 million respectively. To put this in perspective, the FY23 mid-point revenue estimated represents a 6.5% increase compared to FY23 revenues. The FY23 mid-point adjusted EBITDA estimates signify an increase of 25.6% compared to FY22 adjusted EBITDA. I believe the company should be able to achieve these targets and could even outperform, given its efficient product mix. For example, the Nok? Smart Entry systems installation totaled 255,000 in Q3 FY22, up a massive 53% compared to Q3 FY22, and the demand for the product is expected to remain strong throughout FY24.

Key Risk Factor

High debt Obligation : As of September 30, JBI reported a long-term debt of $608.5 million against a cash balance of $109.7 million. The company’s net leverage ratio worsened to 1.8x from 1.5x in the same quarter last year. High debt has resulted in significant interest expense for the company, putting a dent in the profit margins, especially in this high-interest rate market. In Q3 FY23, it incurred interest expenses of $14.5 million, compared to $11 million in the same period last year. The company is addressing this issue and has reduced its long-term debt from $700 million in December 2022 to $608.5 million in September 2022. However, the company still needs to improve its leverage ratio, and investors should take this into consideration before investing in JBI.

Valuation

JBI is trading at a share price of $10.5, a YTD increase of 9%. It has a market cap of $1.54 billion. It is trading at a forward non-GAAP P/E multiple of 11x, considering FY23 EPS of $0.95. I think the company is trading at a discount compared to the sector median P/E of 17x. It has been experiencing solid EPS growth over the past couple of years and is expected to perform even better in the coming years. I think investors can invest in the company at this price point with a long-term view of 3-5 years, and the stock could provide significant returns.

Conclusion

JBI is on a solid growth track with a significant increase in both revenues and net profits. The company has managed to grow revenues while expanding its profit margins, which I think is a positive sign for the company in the long term. It is trading at a cheap valuation at the current price level and could give considerable returns in the coming years. The company faces the risk of a high debt burden, but the management is taking steps to reduce debt. Considering all the growth and risk factors, I assign a Buy rating for JBI.

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