PGTI - The Prognosis For PGT Innovations

2023-12-11 17:38:05 ET

Summary

• Today, we take a look at building supply concern PGT Innovations, Inc., which reportedly rejected a buyout offer two months ago.
• The company posted solid Q3 results in early November, produced record operating cash flow, and continues to buy back its own stock.
• Can the recent rally in PGT Innovations, Inc. shares continue? An analysis follows in the paragraphs below.

Progress is made by lazy men looking for easier ways to do things .”? Robert A. Heinlein.

Today, we take our first look at building products concern PGT Innovations, Inc. ( PGTI ) which has been bolstered by hurricane-related activity and seen a sharp rise in its stock in 2023 despite a moribund housing sector. One of the triggers for its rise over the past two months was a report that rival Miller made a buyout offer of $1.9 billion that was rejected but that valued PGT Innovations at $33.00 a share, where the stock currently stands.

Can the PGTI rally continue? An analysis follows below.

Company Overview:

PGT Innovations is headquartered in North Venice, Florida. The company manufactures and supplies premium windows, doors, and garage doors. PGT Innovations is known for its highly engineered and technically advanced products that can withstand some of the toughest weather conditions on Earth and is headquartered near where Hurricane Ian made landfall in 2022. The Southeast part of the country accounts for approximately three quarters of overall sales, while the Western region accounts for the rest. The stock currently trades right near the reported $33 a share buyout offer in October and sports an approximate market capitalization of $1.9 billion.

Third Quarter Results:

PGT Innovations posted its Q3 numbers on November 2nd. The company delivered a non-GAAP profit of 66 cents a share as revenues rose four percent on a year-over-year basis to $400 million. Net income rose 29% from 3Q2022 to $38 million. Both top and bottom results were nicely above the consensus estimate. However, management lowered its Q4 sales guidance to $325 million to $350 million, below the analyst consensus of the time of $355 million.

Sales in the Southeast region were up 16% compared to 3Q2022 to $303 million. However, $12 million in 3Q2022's revenues were deferred to the following quarter because of Hurricane Ian. Sales in the Western region fell one percent to $97 million. Slower sales of existing and new homes remain a headwind, but the company saw solid repair and renovation demand in the quarter. 37% of overall sales came from new construction in the quarter while repair and renovation related sales made up the bulk of revenue. The Western region is more tied to new construction, it should be noted.

Adjusted EBITDA came in $78 million for the third quarter, up 15% from the same period a year ago. Leadership sees adjusted EBITDA falling to between $51 million and $57 million in the fourth quarter. The company announced a new CFO a few days after its third quarter earnings release.

Analyst Commentary & Balance Sheet:

Since third quarter results posted, both Truist Financial ($38 price target) and Deutsche Bank ($42 price target) have reissued Buy ratings on the stock. Truist commented on the reported buyout offer in October noting a $36 offer, if it came to be " may be moving into the ballpark of what investors would like to see for an offer. "

Only just over one percent of the outstanding float in the shares is currently held short. Several insiders have been frequent but generally smallish sellers of the equity in 2023. So far in the second half of this year, they have disposed of just over $500,000 worth of equity collectively. PGT Innovations ended the third quarter with $38 million in cash and marketable securities on its balance sheet as well as $176 million of credit available on revolving facility. The company lists just over $630 million of long-term debt on its third quarter 10-Q . Net interest expense was just over $7.7 million in the third quarter. PGT Innovations key debt maturities are out some years in the future.

The company generated $80 million of operating cash flow in the third quarter, an all-time record. PGT Innovations used this cash flow to pay down $39 million in revolving debt and spent another $30 million to buy back stock. Through the first nine months of 2023, management has repurchased $75 million worth of its own shares. PGT Innovations has $175 million left on an existing stock buyback authorization program.

Verdict:

The company made $1.92 a share in profits in FY2022 on $1.49 billion in sales. The current analyst firm consensus sees earnings rising to $2.15 a share despite flat sales growth in FY2023. The project profits of $2.44 a share in FY2024 on five percent revenue growth.

A good portion of the rally in the stock over the past two months seemed tied to that rumored buyout offer. This bid was not discussed or brought up by analysts at the company's third quarter earnings call , it should be noted. Given slow sales growth, continued challenges around the housing market thanks to high mortgage rates, and an economy that looks set to slow considerably in 2024 or potentially hit a recession; it is hard to see much value in PGT Innovations, Inc. shares at current levels. The stock trades at over 15 times FY2023E EPS in a cyclical industry. The company appears well-run but also has a good slug of debt on its balance sheet.

I see no advantage in these new clocks. They run no faster than the ones made 100 years ago .”? Henry Ford.

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