2023-05-07 06:26:58 ET
Summary
- Atkore is growing both organically and by acquisition with demand for products accelerating in multiple industries that they serve.
- Strong tailwinds in data center expansion, solar, and digital infrastructure buildout is supporting the growth into 2024 and beyond.
- Currently trading at about 7x forward earnings, the stock offers a buying opportunity ahead of the May 9 earnings report.
As we approach the halfway mark to 2023, some pundits and financial gurus may tell you that the best plan is to sell in May and go away. Then return to the market in the fall when the institutional investors are back in full swing after the summer lull. But if you take their advice, you may miss out on some excellent opportunities that are currently being offered in several growth stocks that I follow, most of which are currently down in price due to recent bearish sentiment. If you believe, as I do, that we are simply embroiled in a volatile bull market that is recovering from the beating it took in 2022, although swinging wildly at times, then you may want to stay invested and take advantage of price swings on some solid growth names.
Looking at the 6-month performance of the S&P 500 since the low set in October, it appears that the bull market has resumed its rise upward. Although the ride has been bumpy due to news of bank failures, ongoing inflation, the Fed continuing to increase rates, and the looming debt ceiling concerns, overall performance has improved by nearly 10% in the past 6 months as the market climbs the wall of worry.
Recently, I am seeing opportunities in several different industries and sectors that range from healthcare and hospitality to technology and industrials. I cannot cover all the names that I am following in one article, so I am planning to do a brief series of articles on this topic. My first article reviewed Kimball Electronics ( KE ), which you can read here . In this second edition for growth stocks that I feel are well positioned heading into the second half of 2023 and beyond, I would like to cover another one that does not get a lot of attention from analysts on SA, nor on Wall Street.
Atkore Inc. ( ATKR )
Atkore was founded in 1959 and is headquartered in Harvey, IL and is now a global manufacturer with facilities all over the world. From the company’s About Us webpage :
Recognized as a leader in electrical, safety, and infrastructure solutions, our products are used to power and protect the world, including Electrical Conduit and Fittings, Cable and Cable Management Systems, Infrastructure Products, and Safety and Security Products. Distributors and contractors globally recognize Atkore as an industry leader and preferred supplier.
With a century of expertise, look to Atkore for the following markets:
- Non-Residential
- Electric Power
- Data Centers and Telcom
- Water
- Transportation
- Solar
Atkore was recognized in 2023 by Forbes for the 2 nd year in a row as one of America’s Best Mid-Sized Companies. With a current market cap of about $4.8B, Atkore has grown via acquisitions, including 6 in FY22, which I discussed in my previous article covering ATKR published in August, 2022. At that time, I rated the stock a Strong Buy and the stock has provided shareholders with a 26% return since then.
Coverage by Wall Street analysts is improving and increasing with 7 analysts now covering the stock with 2 of those giving Strong Buy, 3 with Buy ratings, along with 2 Hold ratings this month, compared to just 3 analysts covering this stock in February.
Back in February after the Q1 earnings report , B. Riley kept a Buy rating but increased the target price from $146 to $161. Loop Capital kept its Buy rating and raised the target from $150 to $170. RBC Capital kept an Outperform rating on the stock and increased the target price from $139 to $177.
The company also consistently wins awards for the best place to work, and for their commitment to ESG (environmental, social and corporate governance) initiatives including Energy Star compliance among others. The stock is currently trading at a still low multiple of about 7.2x forward earnings estimates.
The company is due to report Q2 earnings on May 9, and I rate the stock a Buy prior to earnings, assuming that it will likely report a strong quarter and I expect the share price to pop. Of course, there is about 8% short interest and with the market being volatile there is the possibility that the price could decline further even with an earnings beat. I am currently long ATKR and will look to add more if the price does drop.
FY22 and Q123 Results
Some key points about Atkore that are outlined in the Q1 investor presentation from the investor relations website include:
- Disciplined Operational Focus – values-based, driven by the Atkore Business System
- Strong Track Record of Success
- Market Leadership in Key Product Categories
- Strong Secular Tailwinds including the energy transition and digital infrastructure buildout
- Opportunities for both organic and inorganic growth
- Strong Financial Profile and Long-Term Outlook
This slide from the February presentation clearly illustrates how many important and essential products that the company makes, and why there is growing demand for them.
The business has transformed substantially since the IPO in 2017 with earnings growth increasing considerably in the past 2 years, at least partly due to the 7 total acquisitions made in 2021 and 2022. The sales mix has diversified and expanded with EBITDA of $1.5B in FY2017 growing to $3.9B in FY2022. The company sees a TAM of over $40B and they have captured just about 10% of it so far. TAM keeps growing as well due to the “electrification of everything”, growth in renewables, digital infrastructure (i.e., data centers) buildout, and hardening of the power grid, among other secular themes providing tailwinds to growth.
HDPE products are expected to be a major growth contributor with about a $7B TAM for that market segment. With 4 recent acquisitions completed to address the HDPE market, ATKR is in a strong position to capitalize on that growing market demand. HDPE products are used in multiple industries including power and water, broadband & telecom, oil and gas, transportation, and renewable energy. The performance in FY2022 was greatly enhanced by the additional HDPE product revenues as shown on this chart showing from SA.
When the company issued its Q1 earnings report on February 1, 2023, they reported net sales of $883.8 million, a slight decline of -0.8% from a year earlier (at least partly due to lower average selling prices compared to the Covid pandemic pricing surcharge). Adjusted net income per diluted share increased by $0.03 to $4.61 per share compared to Q122. The outlook for full year EBITDA was raised to a range of $950M to $1.05B and adjusted net income per share expected to be in the range of $15.85 to $17.75. Atkore CEO Bill Waltz summed up the strong start to the 2023 fiscal year in the press release :
“Our team delivered solid volume growth across our business in the quarter as we remain focused on executing our Atkore Business System and differentiating ourselves with customers. Our recent acquisitions – including Elite Polymer Solutions which has bolstered our HDPE offering – also continued to perform well and drive additional growth. As planned, we are strategically deploying capital toward both organic and inorganic growth opportunities as well as returning capital to shareholders. During the first quarter, we repurchased $150 million of Atkore common stock, and we have already repurchased over $100 million dollars in common stock in the second quarter.”
Although some investors may fear that growth is slowing relative to the pandemic-induced price inflation that led to record sales in 2021/2022, the growth in EBITDA and EPS appears to be still well above average as shown by the SA Quant rating factors. For example, YOY revenue growth of nearly 20% is not too shabby, YOY EBITDA growth of 25% is excellent, YOY EPS diluted growth of 37% is stellar, and 52% growth in operating cash flow is outstanding.
The average EPS estimate for Q2 is a reduction to around $4.27 versus the $4.61 reported in Q1. However, ATKR has a history of beating estimates over the past several quarters and there have been 5 upward EPS revisions in the past 90 days. Even if ATKR reports only around $4 EPS for the next 3 quarters that would result in about $16 in total earnings for FY2023. Assigning a very conservative multiple of only 10x earnings leads to a target price of $160 in 2023, which represents about 28% upside from the current price of $125.49. And if the growth has not stalled as some investors fear, then the upside potential is much higher.
Another example of category expansion for ATKR is provided in the Q1 investor presentation. The solar megatrend offers an opportunity for ATKR to provide tubing products for utility-scale solar projects and other large tube applications for renewable energy projects. The company is making an investment in their Hobart, Indiana facility to support that potential growth.
Other product category growth and innovation examples are provided in this slide from the February presentation.
Risks to Consider
Some risks that are specific to ATKR at this stage include the cost containment impacts of multiple acquisitions and the potential for losing market share to competitors. This question was asked specifically on the Q1 earnings call and it was addressed by CEO Bill Waltz on the transcript :
Deane Dray asked: And just one last question for me. Talk about the pipeline of M&A? And are you seeing any other competition coming in? Because, obviously, this is a really attractive niche and the surprise for some investors to say, how come you haven’t seen anyone else trying to elbow their way in?
Bill Waltz: Yes. So, to that great question, Deane, and for whoever also thinking of those questions. But no, we haven’t -- let’s put it this way. There is no increased trend that we’ve seen as people bought other companies that we’ve passed by, yes. But again, I think Atkore is unique that most companies we buy are privately owned family enterprises, small enough on the radar that a large private equity firm wouldn’t have the management structure to put in place with them, are large electrical peers to have different niches than we do in this set of, call it, Raceway products, that I think we are uniquely in a position to acquire most of these companies as they come up to market.
So they never say never or something hasn’t been sold to somebody else, of course, but no increased trend and the market is still active. We’re actively pursuing things. We’ve actually increased the size of our M&A team here in the last month, just to continue to expand, whether different products in the States look more aggressively into Canada, look more aggressively into Europe. So we are deploying our capital well between M&A, internal investments, and obviously, stock buyback.
Broader concerns regarding a slowdown in demand due to macro conditions that are beyond the control of the company including concerns about data center growth slowing, a solar industry pause, or delays in infrastructure projects may have some short-term impacts on the backlog. But many of those types of customers are looking at fulfilling long-term needs and will likely resume growth later this year resulting in even better results in the second half of 2023 as those orders get filled when delayed or canceled projects resume. Again, this topic was addressed by CEO Waltz on the earnings call:
Yes, we're still optimistic or consistent on volume going forward in the -- let's call it, the mid-single digits for the rest of the year. When I'm out talking with our customers -- I just flew back from a convention here late last night. 6 months, 9 months, a year of backlog with our distributor partners. So I would continue to see others. As you mentioned, there's going to be a delayed job here or there, either because of somebody getting equipment in or someone reconsidering things, yes. But there's enough volume there. There's enough Atkore capabilities to drive our fair share of growth beyond the market that I would estimate mid-single digits.
Summary
While the company prepares to report Q2 earnings on May 9, my expectation is that the results will likely exceed analyst expectations for the quarter and guidance for the rest of the year will be strong, which is likely to cause the stock price to pop. A recent example of this behavior was demonstrated by another company that supplies infrastructure equipment, SPX Technologies, Inc. ( SPXC ). SPXC rose 20% after reporting an earnings beat on Friday May 5.
SPX Tech cited "increased sales of both cooling and heating products resulting from price increases across the majority of our product lines and volume increases resulting from improved plant throughput and more stable labor and supply chain environments."
Even though SPXC is in a different market sector the implication of more stable labor and supply chain environments should also be a positive for ATKR. And even if the stock price does not jump 20% after the earnings report, I believe that the current price is far below where it should be given the growth prospects that lie ahead. By the end of 2023, I would expect ATKR to be trading at about 10x earnings which will be somewhere in the range of $160 to $180 per share, based on current 2023 EPS estimates of roughly $16 to $18. For these reasons, I rate ATKR a Buy ahead of earnings.
For further details see:
Atkore: Another Growth Stock To Consider For The Second Half Recovery