PGTI - PGT Innovations: Heavy Storms Driving Growth Stock Likely To Outperform

2023-09-29 05:58:26 ET

Summary

• PGT Innovations produces heavy-duty windows for protection against hurricanes and strong winds.
• The company has a low valuation with strong expected earnings growth, potentially driving the stock for significant gains.
• The markets for PGTI's products, including impact-resistant glass, are expected to grow in the next five years, providing a tailwind for revenue growth.

In my ongoing search for stocks with the potential to outperform the broader market, I came upon PGT Innovations ( PGTI ). PGT Innovations produces heavy duty aluminum and vinyl frame windows for protection from hurricane-force winds and wind-borne debris. The company has a low valuation with strong expected earnings growth, which can drive the stock for significant gains.

The ongoing threat from hurricanes and tropical storms creates the need for PGT Innovations' products. Every year an average of 10 tropical storms develops over the Atlantic Ocean, Caribbean Sea, and the Gulf of Mexico. Six of those storms become hurricanes. About 5 hurricanes hit the U.S. coastline in an average 3-year period.

The company offers various impact-resistant doors and windows with laminated glass that are designed to stand up to heavy wind and flying debris resulting from high winds. PGTI also offers a variety of non-resistance windows and doors.

This Florida-based small cap company is on its way to becoming a mid-cap company. Currently, PGTI has a market cap of $1.57 billion. This is only $430 million away from the official $2 billion market cap which defines mid-cap companies. The company's stock price would just have to hit $34.28 based on 58.35 million shares outstanding to hit the $2 billion market cap milestone. This is only 23% above the current stock price. This could be reached within a year, given PGTI's low valuation and strong expected earnings growth.

Outlook for Future Growth

The markets for PGTI's products are expected to grow over the next five years. The market for impact-resistant glass is expected to grow 9.1% annually to reach $31.3 billion by 2028. This growth is expected from increased construction and infrastructure spending which PGTI may benefit from. The reason behind the use of impact-resistant glass in buildings is for the maximum protection and safety of people.

The global window and doors market is expected to grow 4.4% annually to reach over $290 billion by 2028. This growth is expected to be fueled by increased construction of commercial and residential buildings and from renovations. These growth markets should provide a nice tailwind for PGT Innovations to continue to increase revenue/earnings.

Of course, PGT Innovations has strategies for capitalizing on the industry's expected growth. The company completed its acquisition of garage door manufacturer, Martin Door Holdings , at the end of 2022. PGTI paid $185 million for Martin which is expected to generate about $60 million in annual sales. This expanded the company's product line into garage doors which PGTI did not previously offer.

PGTI opened up three new showrooms in Texas during Q2 2023 (San Antonio, Dallas, & Ft. Worth) for its NewSouth Window Solutions brand. The brand will also open a new location in Austin later in 2023. These locations offer PGTI's NewSouth products and Martin Garage Doors. These moves expand PGTI geographically, which brings the company's products to more potential customers.

PGT Innovations partnered with Corning ( GLW ) to offer a new product known as Diamond Glass. Diamond Glass is the company's new impact-resistant glass. The benefits of Diamond Glass are lower weight, improved clarity, 3x more scratch resistant, and improved energy efficiency. PGTI's premium WinDoor brand will incorporate the new Diamond Glass in its products.

The company plans on delivering its thin triple insulated glass units to window and door manufacturers in early 2024. This will help satisfy the demand that PGTI is seeing from builders and customers.

PGTI has an order backlog of $247 million which is $11 million higher than the end of Q1. The growth in backlog was attributed mostly to demand from the Southeast segment.

PGTI has been focused on operational efficiencies which is expected to drive margin expansion. The company was also able to successfully increase prices this year to offset material and wage inflation.

Attractive Valuation

PGT Innovations is trading attractively according to most valuation metrics. The company is trading at 11.6x expected EPS of $2.40 for 2024. This is lower than the Building Products & Equipment industry's forward PE of 15.6x . The EPS growth rate for 2024 is estimated to be about 12.4%.

The stock also has an attractive PEG ratio of only 0.95. It is considered a bargain when you have a growth stock trading with a PEG below one. PGTI's low PEG is based on expected 3-5 year average annual earnings growth of about 13% .

The stock is also trading with a low Price/Cash Flow of 9x which is lower than the sector median of 12.7x . PGTI had $172 million in operating cash flow over the trailing 12 months and was left with $113 million in unlevered free cash flow and $94.5 million in levered free cash flow.

The stock has plenty of room to move higher at these levels in my opinion. The company's earnings growth is likely to help drive the stock higher.

Technical Perspective

PGTI's daily chart shows the price rising from a bottoming out process. This is indicated as the blue MACD line in the middle of the chart crossed above the red signal line. The purple RSI line is also bullish as it increased above 50. The stock is now in an uptrend which should continue if the company continues to report positive news. The next earnings report on November 1, 2023 could be the next catalyst to determine if the uptrend continues.

Balance Sheet

The balance sheet shows PGTI with $39.4 million in total cash/equivalents and total debt of $783 million. This leaves the company with $744 million in net debt. The company has 2.7x more current assets than current liabilities and about 1.7x more total assets than total liabilities for total equity of $648 million.

The lower amount of cash in relation to debt could create the need for PGTI to issue new debt for acquisitions. The company does have a history of issuing new debt in most years. The company also tends to repay a fraction of the amount of debt issued in most years.

It is noteworthy to point out that the company implemented a share repurchase authorization in Feb. 2023 in the amount of $250 million which can be beneficial to shareholders.

S&P Global rates PGTI with a B+ credit rating with a stable outlook. From what I saw from the balance sheet, it looks like the company handles its cash flow and debt effectively.

Risks to the Investment Thesis

Currently, PGTI produces positive cash flow. However, if business dropped off significantly causing the cash flow to go negative, PGTI could have trouble paying off its debt.

Another risk could be spikes in the price of raw materials which could reduce profit margins. The company also relies on a limited number of suppliers. So disruptions from one or more suppliers could lead to higher costs for PGTI.

PGT Innovations Long-Term Outlook

PGT Innovations appears to have good strategies for long-term growth. The company has efforts to grow geographically as it opens showrooms in new locations. PGTI's product improvements show that the company has a focus on continual innovation to keep it on the cutting edge of the market. Finally, add-on acquisitions can help the company add new product lines, expand existing product lines, and to help grow geographically. PGTI's strategies look effective to grow along with the expected industry growth.

Analysts are giving the company a one-year price target of $35 which is 24% higher than the current price. That looks reasonable as it would bring the PE to 14.6x expected EPS of $2.40 for 2024. That would still be below the industry's PE of 15.6x. PGTI's strong expected earnings growth has a good chance of driving the stock to reach the price target from the low valuation.

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