2023-04-25 21:22:39 ET
Summary
- Patrick Industries is a manufacturer and distributor of small building components used in the production of RVs, boats, and manufactured housing.
- Over the last decade, the company has put up fantastic growth in revenue and earnings, with shares up 800%.
- Valuation remains compelling at 4.4x EV/EBITDA and 5.2x P/E, even when we account for earnings compression based on the last recessionary environment.
Investment Thesis
Patrick Industries, Inc. ( PATK ) is a manufacturer and distributer of small building components used in the production recreational vehicles (RVs), boats, and manufactured housing. Over the last 25 years, the company has compounded revenues at a 27.3% CAGR and has grown EBITDA at a 39.5% CAGR, benefitting from secular demand trends in leisure lifestyle and housing. While the company faces industry headwinds and macroeconomic uncertainty in the near term, I believe the market has more than priced for these risks in the company's valuation and that shares look attractive today.
Overview
Patrick Industries manufactures and sells building materials used in the RV, marine, manufactured housing, and industrial end markets. This includes both internal and external building materials, including HVAC, flooring and roofing materials, exterior cement siding, and all of the necessary components to build RVs and boats, and complete residential and multifamily construction projects. By end market , about 53% of the business is RVs, 21% marine, 15% manufactured housing, and 11% industrial. The company operates about 140 manufacturing and distribution facilities throughout North America.
One of the things that first drew me to Patrick Industries was its ability to compound earnings at high rates of returns for over a decade. In the last ten years, the company has grown revenues at a 27.3% CAGR and EBITDA at a 39.5% CAGR . This has also been seen in its share price performance with shares up 800% over this time period.
Selling building components to RVs may not sound like a particularly sexy business, but it has certainly led to tremendous returns for Patrick Industries' shareholders over the years. Today, the company generates nearly $5 billion a year in revenue and $626 million of EBITDA and has situated itself as a market leader in the industry.
A key factor that has led to the company's success is their leveraging of deep relationships with OEMs, many of who have been partnered with the company for decades, like THOR ( THO ) and Forest River, who collectively make up over 40% of the company's RV sales. While there is likely some customer concentration risk of sales being so closely tied to just two customers, I believe that the deep reliance the companies have on one another ensures a strong and stable partnership. As a Patrick Industries shareholder, I would watch Thor's quarterly reports carefully for indications about how RV sales are trending.
Over the last decade, Patrick Industries has spent $2.1 billion on acquisitions which have helped it to expand its product offerings, geographical footprint, and grow its customer base. The company has typically focused on acquisitions with complementary product lines where it can also leverage its existing distribution network and manufacturing capability to realize synergies. I view these investments in R&D and M&A as one of the reasons Patrick Industries has become a market leader in the industry and is one of the key factors that have led to their success.
Acquisitions and FCF (Author, based on data from S&P Capital IQ)
In addition to its acquisition strategy, Patrick Industries has also been focused on returning capital to shareholders via dividends and share repurchases. In 2022, the company repurchased $77 million worth of shares and paid $33 million in dividends, resulting in $110 million in total cash returned to shareholders. At year end in December, the company also increased the authorized amount on its share repurchase program to $100 million. By distributing earnings to investors through the means of dividend payments and share repurchases, I view Patrick Industries as being focused on rewarding shareholders and signaling to investors that its financial position is strong.
Investor Presentation
Recent Quarter
In its most recent quarter, with interest rates rising and consumer spending decreasing, revenues for the RV segment fell 39% in Q4 2022 as OEM customers reduced their output by 48% versus the prior six-month period to address slowing retail demand and better manage their inventories. The drop in shipments was mostly driven by an estimated 23% decline in RV retail demand, however content per wholesale unit was up 31%.
I think the increase in content per wholesale unit is both positive and meaningful. Even in the last recession, Patrick Industries was actually able to increase its content per unit. With content per unit being one of the key drivers that supports revenue growth and measures how much value the company is able to provide to OEMs, I believe this is a metric that should be watched closely.
With Patrick Industries being involved in the Marine business, a segment it has grown from having less than 1% of the market in 2017 to having 18% of the market today, we can see the diversification benefits in tougher economic periods like the one we are facing today. For the quarter, Patrick Industries saw marine revenues up 35% as OEMs replenished depleted inventory levels.
From 2007 to 2009, Patrick Industries revenues fell nearly 50% during the recession. Back then, the company's business mix was almost entirely RVs and manufactured housing, so there was virtually no diversification to its revenue base. All in all, when we consider that the business is more diversified, more profitable and better positioned to manage an economic downturn, I believe Patrick Industries can weather the storm successfully.
Financials
Over the last decade, Patrick Industries has grown revenues and EBITDA at CAGRs of 27.3% and 39.5%, respectively. In addition to revenue and EBITDA growth, the company has also improved its margins and profitability over the years. When looking at margins, gross profit margins have increased from 17.9% in 2017 to 23.0% in 2022, while EBITDA margins have grown from 9.5% in 2017 to 12.9% in 2022. I view these long-term improvements in profitability as a reflection of the company's ability to effectively manage costs and optimize its operations.
Revenue and EBITDA (Author, based on data from S&P Capital IQ)
One key metric for Patrick Industries' that really stood out to me was its ROIC, which has consistently been in the mid-teens to 50%+ range over the last ten years, well in excess of its cost of capital. When we consider that its current ROIC of 38.1% was achieved on a total net leverage ratio of 1.9x for the year, it suggests that the company is generating high returns on its invested capital despite having a moderate level of debt. I view this as a positive sign, as it indicates that the company is using its capital efficiently and effectively to generate profits.
Return on Invested Capital (Author, based on data from S&P Capital IQ)
On the balance sheet front, Patrick Industries has $1.3 billion in long-term debt, with the bulk being due in 2026 and 2027. The company has a tiny cash position of just $23 million, however this isn't unusual compared to previous years and the company has unused capacity of $485 million on its revolving credit facility so the company has access to cash if it needs it. Further, short-term liquidity ratios like the current ratio are strong at 2.5x so the company is not facing a cash crunch any time soon, making me less worried about the tiny cash position.
Valuation
Patrick Industries had a great 2022 and its unlikely it can repeat its banner year again this year or next year given the economic environment we are in. At 4.5x EV/EBITDA and 5.2 P/E, the market is clearly suggesting that earnings are expected to fall.
Since its difficult to estimate normalized EBITDA for 2023, if we take Patrick Industries EBITDA from 2018 of $233 million (pre-pandemic) and apply a simple 8% annual growth rate to get to normalized EBITDA for 2023 of $342 million, the company is trading for about 8.7x EV/EBITDA using this normalized approach, which is below the forward multiple of 9.2x. I think this is a fairly reasonable estimate as the company's EBITDA for 2022 was $627 million and a $342 million normalized EBITDA for this year would be about a 45% drop. When we consider that the business is more diversified compared to the last recession and that the company's EBITDA fell 28% from 2007 to 2009, I believe my normalized estimate is conservative and there is sufficient downside protection at the current price.
Conclusion
In summary, Patrick Industries is more diversified and better equipped to navigate industry headwinds and macroeconomic uncertainty compared to the last recession. As a market leader, I'm confident that the company will be able to further diversify its business into new verticals and/or continue to make strategic acquisitions. When considering the macro environment and slowing demand for RVs, revenues and earnings are likely to compress in the near term, however it seems the market has more than priced this into the stock. If history is any indication, with a strong track record of good capital allocation buying back stock and paying dividends, I believe investors focused on the long-term fundamentals of this company will be rewarded. Hence, I recommend PATK stock as a buy.
For further details see:
Patrick Industries: An Attractive Valuation Makes This Compounder A Buy