WGO - Patrick Industries: A Good Player Pricing In A Recovery In 2024

2024-01-07 02:26:07 ET

Summary

• Shares of Patrick Industries have recently reached all-time highs around $100 per share.
• The company has experienced strong long-term growth and success in the RV, manufactured homes, and marine industries, while 2023 was a tough year.
• Following a big and recent rally, I am awaiting a potential dip before considering an investment.

Shares of Patrick Industries ( PATK ) have recently seen a strong momentum run, with shares trading near their all-time highs around $100 per share. It has been a long time since I looked at the shares, in fact it was spring of 2017 when I called Patrick a great serial acquirer which could be bought on dips.

Optically, shares have doubled since 2017, but in fact they have more than doubled as a 3-for-2 stock split was performed in 2017, making that on adjusted basis have more than doubled over this period of time, all while investors have collected modest dividends as well. While shares look pretty cheap and backed up by a strong record, I would like to see a dip after shares have recently rallied, before considering an allocation.

A Recap

Patrick Industries is a supplier of components which are used in RV, manufactured homes and marine, as the company quickly built up a track record, being led by CEO Todd Cleveland since 2009. Starting at a harsh point in the cycle, when Patrick's revenues only came in just over $200 million and the business was overleveraged, Patrick started to perform rather well in the earlier 2010s.

By the mid 2010s, the market started to recognize those growth qualities and M&A capabilities of Patrick in the years before. In fact, the company has been able to successfully integrate multiple deals per annum, apparently being flawlessly integrated in the business, with the company benefiting from growth in the RV market, fueled by a robust economy, as well as again and wealthy baby boomers spending their dollars, and millennials embracing the outdoor lifestyle.

By 2017, the run rate has risen to $1.4 billion in sales as operating margins around 6-7% were pretty decent, while the company traded at a market multiple in terms of earnings and operated with about 2 times net debt. While I greatly liked the track record of the business and its management, I was mindful of past reversals in RV markets as well.

Coming To Life

Pre-pandemic, shares of Patrick kept trading around $50 per share as shares rose to the $100 mark in the spring of 2021, with optimism in the market and economy peaking. Moreover, Andy Nemeth has assumed the role at the top helmet of the business during the pandemic year 2020.

Shares plunged to just $40 in 2022 amidst inflationary pressures and concerns on growth and the RV market induced by higher interest rates, but shares have seen a decent recovery to the $100 mark again by now, with shares trading at their highs.

Growth in the business mix meant that Patrick, which in the 2010s relied largely on RVS, has seen this share shrunk to less than half of sales, with growth seen in housing (to a lesser extent) but mostly by exposure to the marine sector.

Fast forwarding to February 2023, Patrick posted a solid 20% increase in 2022 sales to $4.88 billion and operating profits of $496 million grew even quicker, slightly topping 10% of sales. This worked down to net earnings of $328 million, equal to $13.49 per share, including a $1.15 per share charge related to its convertible notes, as amortization charges were already expensed into these earnings numbers as well.

While growth was solid, fourth quarter revenues were down 17% to $952 million, with GAAP earnings down nearly a dollar to $1.68 per share. All the dealmaking efforts made that net debt ticked up to $1.26 billion, yet with adjusted EBITDA running at $643 million, this worked down to about 2 times leverage. That said, this multiple rose a bit if we look at the most recent quarter, with fourth quarter EBITDA of $108 million coming in way short on an annualized basis.

2023 - A Tougher Operational Year

First quarter sales for 2023 fell by a third to $900 million as weakness in RV was just in part offset by growth in marine operations, with quarterly EBITDA down to $97 million. Second quarter sales fell by as much as 38% to $921 million in what seasonally is a stronger quarter, with EBITDA reported at $114 million.

Third quarter sales fell some 22% to $866 million, although that adjusted EBITDA of $113 million looked relatively strong. Based on the current run rate, the company is on track to generate about $3.5 billion in annual sales and about $350 million in adjusted operating earnings, comprised out of reported operating earnings plus amortization charges being added back. All of this makes realistic earnings of around $200 million possible for the year, still working down to earnings of $9 per share and change based on a share count of 21.5 million shares.

While earnings are down substantially from last year, a $9 per share run rate looks a lot more sustainable and frankly not very demanding, even as shares have risen to the $100 mark. This results in a mere 11-12 times earnings multiple, as net debt came down to $1.1 billion, aided by inventory de-stocking. With EBITDA trending around $450 million, this makes for a leverage ratio in the mid-2s.

To offset the increase in (relative) leverage, the company stepped down the pace of dealmaking this year, as increased confidence (aided by a recent decline in interest rates) made that the board announced a ten cent hike in the quarterly dividend to $0.55 per share, with that $2.20 per share dividend payment yielding just in excess of 2%.

And Now?

The moves displayed by Patrick here are quite similar to the ones seen by peers like Thor Industries ( THO ) and Winnebago Industries ( WGO ) in the sense that investors are pricing in rosy long term growth projections. These are driven by lower interest rates and secular trends like the baby boom generation continuing to retire and spent money on this category (at large).

While the business has become a lot more diversified, all segments were hit by inflationary pressures, labor availability, labor inflation and the fact that end markets represent big ticket items, all hurt by economic concerns, but mostly higher interest rates.

There is some positive news as well, with comparables rapidly getting easier and debt concerns not being high, which is likely the reason why investors have sent shares higher in recent weeks. In fact, shares have rallied some forty percent since early November, as this move was rather big, triggering a recent CEO sale of stock as well.

While Patrick continues to be a great long-term investment in my view, being more diversified and valued at lower multiples, I am not chasing shares the shares here given the recent run. Shares however deserve a prominent place on my watch list again, as I am looking to get involved at a big potential pullback as the long term qualities of Patrick remains seen, with M&A providing continued opportunities to grow shareholder value.

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