2023-10-05 08:05:00 ET
Summary
- Carlisle Companies is well-positioned to benefit from the demand for energy-efficient buildings and less labor intensive solutions.
- Despite near-term headwinds, CSL has a strong track record of growth and profitability, with a robust backlog and potential for EPS growth next year.
- CSL stock offers attractive opportunities for long-term investors with a strong balance sheet, consistent dividend growth, and a share buyback program.
I tend to favor high dividend paying companies, but understand that some investors prefer total returns that may come more from capital gains. There are certain inherent advantages to this strategy, as capital gains aren't taxed until the shares are sold, and for investors who don't need cash now, total return stocks may be a good portfolio diversifier, especially if the underlying company carries moat-worthy characteristics.
This brings me to Carlisle Companies ( CSL ), which I last covered here earlier this year with a 'Buy' rating. In what seems like lifetime in terms of everything that's happened in the stock market at the broader economy over this timeframe, CSL has chugged along with a respectable 6.4% total return since my last piece, surpassing the 5.2% rise in the S&P 500 ( SPY ) over the same timeframe.
The stock has seen ups and downs over the past 12 months, and currently trades in a 'goldilocks' zone from a technical perspective, sitting right around the middle of its 52-week trading range. In this piece, I highlight recent developments and discuss what makes CSL a quality buy for investors over the long run, so let's get started!
Why CSL?
Carlisle Companies is a diversified industrial company with a vast footprint the weatherproofing and construction materials segments for more energy-efficient buildings, as well as its interconnect business that serves the aerospace and medical industries.
Since 2021, CSL has pivoted away from diversified industrial products to focus more on being a building products pure-play, and today it derives 90% of segment EBITDA from building products. This shift appears to be working well, as public policy has dictated a need to reduce greenhouse gases. Moreover, CSL's solutions enable builders to be less labor-intensive, which is a plus for tight bottom lines in this inflation-persistent economy.
As shown below, CSL's revenue has trended up over the past 10 years, with growth accelerating over the past 2 years, and encouragingly, EBITDA margin has expanded too, resulting in a higher profitability rate.
Of course, challenges to the building segment are well known by now, with risks stemming from higher interest rates, which raise the cost of new construction. Plus, CSL should be considered as a cyclical company to do its industrial-heavy nature, and a hard landing to the economy (perhaps due to high interest rates) may result in near-term headwinds to its business model.
But these challenges are well known by the market by now, and should be largely baked into CSL's current stock price valuation, lest the marked take a hard turn for the worse. Plus, higher energy costs should be a demand driver from customers looking to save on electricity costs, which according to the U.S. Energy Information Administration grew by 11% last year and is projected to grow by another 4% this year. Management believes that the company is well-positioned to meet customer demand through its proprietary solutions, especially considering the large greenfield opportunities in this space, as discussed during the last conference call :
Our industry-leading ability to meet the well-known growing need for energy-efficient solutions for buildings and to drive a reduction in carbon-related emissions from buildings that as many of you know, account for close to 40% of global energy emissions. Carlisle's robust pipeline of proprietary innovative new products coming to market, accelerated by our increased investment in R&D. CIT's backlog is notably higher than pre-pandemic levels, giving us confidence that CIT has significant growth potential for the foreseeable future.
While revenue was down by 15% YoY during the second quarter, this was due more to channel destocking and weather related events such as hot weather in Phoenix that delayed some construction. Nonetheless, CSL maintained strong adjusted EBITDA margin of 31% and due to this high profitability, management expects full year 2023 EBITDA to be higher than the prior year despite revenue being down.
CSL maintains a strong BBB rated balance sheet with a reasonably low net debt to EBITDA ratio of 1.65x. While CSL's dividend yield isn't particularly high at 1.4%, it's well-covered by a 17% payout ratio and comes with a high 15.5% 5-year CAGR. CSL is also well on its way to becoming a Dividend King with 45 consecutive years of dividend raises under its belt.
Moreover, CSL should be considered as more of a total return story, as mentioned earlier, considering that management deployed $250 million in share buybacks in the first half of the year, more than the $77 million paid out as dividends. As many investors know, share buybacks are a more tax efficient way of returning capital to shareholders. As shown below, CSL has reduced its share count by 16% over the past 10 years.
Lastly, CSL doesn't appear to be expensive at the current price of $256 with a forward PE of 15, sitting well below its normal PE of 20. This is considering its strong track record of growth, high profitability, and tailwinds stemming from demand for green buildings and labor-reducing solutions, as supported by its robust backlog that's higher than pre-pandemic levels. Furthermore, analysts also expect EPS growth of 15.9% next year.
Investor Takeaway
Carlisle Companies is a quality industrial company with a strong track record of growth and profitability. Its focus on building products makes it well-positioned to benefit from the growing demand for energy-efficient and green buildings, as well as the need for labor-saving solutions in this inflation-persistent economy.
While there are some near-term headwinds to consider, they appear largely priced into the stock at current levels. With a strong balance sheet, consistent dividend growth, and share buyback program, CSL presents an attractive opportunity for long-term investors.
For further details see:
Carlisle Companies: Why This Future Dividend King Is A Buy