PGTI - PGT Innovations: Looking To Buy The Dip If It Comes

2023-05-16 18:38:56 ET

Summary

• PGTI achieved a 5% sales growth in 1Q23, and EBITDA margins reached 18.6%, demonstrating management's efforts to enhance operational efficiency and control expenses.
• I expected continued growth, particularly in the repair and remodel sector, driven by high inflation rates and stabilized home prices.
• The current valuation of the stock appears to have already factored in the positive demand outlook.

Investment thesis

PGT Innovations ( PGTI ) manufactures building products such as windows and doors. I see PGTI as a company that provides exposure to the story in Florida for impact products - for properties that are highly vulnerable to storms. The growing population in Florida is a tailwind that I believe will continue to drive new residential construction and repair/remodel [R&R], resulting in demand for PGTI products. Given PGTI's strong market position in Florida (where it generates the majority of its revenue), I believe the company is well-positioned to meet these demands. Furthermore, we can see from management actions that they truly believe in the business by protecting it from acquisition and repurchasing its shares. The only problem is that all of this optimism appears to have already been priced into the valuation (the forward EBITDA multiple has reverted to the average since the beginning of this year). As a result, I recommend a hold rating for the time being, but would look for buying opportunities if the stock price drops.

1Q23 results

PGTI's sales increased by 5% in 1Q23, which fell within the company's expected range of 3% to 9%. Organically, a decline in volume (-5%) was offset by the increase in prices (+8%), leading to a 3% increase in organic revenue. Despite the initial impact of multiple storms in California and Arizona, the Western region led the charge, with revenue increasing by 9% thanks to exceptional execution and minimal lead times. As the company has been successful in expanding its relationships with dealers and regional builders, new construction volumes have remained stable, while the Southeast region has shown a 4% increase due to the ongoing strength of R&R projects. In terms of final markets, new home sales were flat, while sales for organic repairs and remodels increased by 4%. In addition, PGTI's adj EBITDA margin in Q1 2023 was 18.6%, a significant improvement over the projected range of 16.2% to 16.4%.

Growth outlook

I thought the management team did a great job of conveying the company's optimistic growth outlook during the call. The management team is optimistic because they've seen firsthand how quickly homeowners and buyers have adjusted to the new market conditions. The 1Q23 saw exceptionally high R&R demand, and the company anticipates continued growth throughout the year. I believe PGTI is in a sweet spot, where it could reap some benefits from the macro environment. High inflation rates have kept many people from leaving their homes (leading to more R&R), while the stabilization of home prices has boosted confidence in home buyers. As a result of Hurricane Ian and the home hardening tax credit , I also anticipate continued robust demand for PGTI in the state of Florida. I am also optimistic about the future of new builds, particularly in light of PGTI's recent success in securing several new wins from regional builders.

Margin

The significant margin improvement was encouraging evidence of management's efforts to improve operational efficiencies and rein in expenses. The positive pricing versus cost dynamic is, of course, a factor. Taking a closer look at the margin increase reveals that PGTI has the ability to raise prices to counteract inflationary pressures, as evidenced by the rise in gross margin. Since inflation rates are still very high, I believe PGTI will maintain this pricing strategy at least through FY23. On the cost side, aluminum and vinyl prices have been stable, and I expect them to remain so this year or even decline slightly as the market finds its footing. Glass has been the only rising commodity, but PGTI has been able to offset this by bringing more production in-house. Management is confident they can hit their EBITDA margin target of 18% for FY23, which if well executed would provide more cash for buybacks.

Valuation

Today's valuation, I believe, has already factored in the positive demand outlook. PGTI used to trade at around 9x forward EBITDA, but now trades at 8.1x forward EBITDA. Looking back over the last decade, the best time to buy the stock has been when it fell below 7x forward EBITDA, as the stock has almost always reverted to mean. The most recent buying opportunity was last year, when the stock fell below 7x and has since reverted to the average, resulting in a 20%+ increase in share price. Furthermore, management seems confident that the current share price does not accurately reflect the company's long-term value, so it will likely continue to buy back shares. One way to look at it is that if we assume 9x EBITDA is the "right multiple," we can expect management to buy back shares below that multiple.

Conclusion

In conclusion, PGTI reported solid sales growth in 1Q23, meeting their own guidance range. PGTI's improved EBITDA margins reflect their effective operational execution, pricing actions, and cost containment measures. Looking ahead, I believe the company's market position in Florida, a region susceptible to storms, positions them well for the growing demand for impact products. Management is also optimistic about future growth, expecting continued demand from the repair and remodel sector and potential opportunities in new residential construction. However, the current valuation appears to have already priced in these positive prospects, and the recommendation is to hold the stock for now, while monitoring for potential buying opportunities if the stock price declines.

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