2023-05-03 13:28:39 ET
Summary
- Rogers is a superb investment I made after a failed M&A crash. The investment has returned more than 50% since that time, which comes to less than 7 months.
- At this time, I'm going to revisit the Rogers corporation and see if you should still buy this non-dividend stock at a price of around $157/share.
- Rogers remains a very attractive company to look at - but only at the right price. And with the market in turmoil, people need to be careful with their capital.
Dear readers/followers,
When I first wrote on Rogers ( ROG ), I pretty much said that this particular business is simply worth more than $100/share. This proved to be quite correct, as the stock is up more than 50% since.
The market we're seeing now is quite problematic in terms of downward volatility - so in this article, I'll review how attractive Rogers is in relation to other investment possibilities at this time.
Let's see what we have, and why Rogers is a company I actually consider to be quite valuable.
Rogers Corporation: Value to be found here - but watch the rest of the market
When I first wrote about Rogers, it was an undercovered, underappreciated, and undervalued with potential coming straight out of a failed M&A. The company had fallen massively.
What I did was what I do with most stocks - I applied my lens of value investing and finding undervalued quality at a great price, and I didn't look back.
First off, we have to remember though that Rogers doesn't pay a dividend. That makes it an absolute minority in my overall investment portfolio. Very few stocks I own do not pay a dividend. In fact, as I am writing this article, Rogers is the only company that has this particular characteristic.
That doesn't mean it's not a good business though. Rogers has beaten the market over time and operates in a very attractive set of segments in mission-critical segments where its products are not optional.
The synergistic merger with DuPont (DD) did not happen - but that doesn't mean we should undervalue ROG, which is exactly what the market did a few months ago. Whenever the market does this, the time is not there to hesitate - but to "BUY" - so that is what I did.
Results since that time have been very good, and I mean that both on the share price as well as on the operational side of things. To add color to this, we have the 1Q23 results from Rogers to look at.
Roger's focus for the 2023 fiscal is basically to dig down into its corporate trends, improve its cost, its margins, and to prepare the organization for the company's plan for 2025 and beyond. The overall market trends that Rogers is under mean that the company is likely to be very attractive going forward. Even today, the revenue mix seen by Rogers seems tailor-made for this market and going forward.
There isn't a single revenue segment here that's irrelevant or legacy going forward. All of what is shown here is attractive, as I see it, and Rogers has had significant wins in 1Q23 in the areas of ADAS, EV, and energy markets. Top-line results are up, and while negatives persist, these are negatives for every single company out there. I'm talking about negatives or challenges like global macro, cyclicality in the consumer electronic market, and EVs off ATHs, which will likely see some volatility going forward. At best, we can expect Rogers to mostly perform decently - but a decent performance from a quality company at a massive undervaluation is still more than good enough to invest in.
That is, after all, the core thesis that caused me to "BUY" it in the first place.
The company is laser-focused on secular trend and growth markets, which are going to move upward in the next few years. This combined with a robust asset base and portfolio, as well as the proven fundamentals the company does have, leads me to stay positive on Rogers.
1Q23 saw non-trivial gross margin improvements of almost 100 bps. The overall results beat estimates by a margin, and the company provided 2Q guidance as well.
Rogers is an above-average company in the segment, with operating, gross and net margins either slightly or significantly above peers. It has less debt than the competition at 0.16x to equity and 1.17x to EBITDA, and it scores very high on traditional scoring methods, such as the Altman-Z Score. While its ROIC profitability is not the best in the business and has been negative in the past, the improvements I see over the past few years are trends I expect to continue.
The company has been consistently growing shareholder equity and assets over time.
And this, by the way, is without excessively growing its debt. Debt is up, but it's from a position of near zero. Rogers is cash-heavy and has proven it can generate positive FCF even in difficult times.
Its net margins are not the best in the industry, but a double-digit net margin on a 33.1% gross margin will always cause me to be interested in this segment. Its mix is attractive - 54.6% advanced electronic solutions, and 43.2% in Elastomeric materials. The company's attraction is further cemented by the fact that there was non-trivial insider buying after the M&A fell through.
Rogers is a high-quality company - and it's one that will likely continue to grow here. However, after delivering more than 50% in a market that delivered less than 10% of that on a comparative basis for some indexes, it begs the question if this company has actually gone as far as it can for the time being.
The higher the company goes, the more its future growth is predicated on the fact that a premium has to be upheld. In the case of Rogers, it's a relatively high premium, even for the segment. And, as the company itself communicates, it's still in the midst of a transformative journey at this particular time. 2023E results are expected - by me, and others - to actually be lower than 2022A. Significant improvements are unlikely to materialize until 2024-2025.
So, despite decent guidance for 2Q...
The company competes with other engineered materials manufacturers. Generally speaking, there's a very high degree of specialization in these segments, which makes specific peers hard to find. Some that I was able to identify are Photronics ( PLAB ), Corning ( GLW ), and Coherent ( COHR ). While Corning is larger, the company isn't in exactly the same areas either. These trends mean we should look at similar segments, and similar segments are equally opaque in terms of their forecastability.
So, it pays to be careful here.
Rogers Valuation - I'm about to shift my thesis
The company has delivered a large amount of returns. This is especially true for a business that does not have a dividend. So that 50%+, that may be something I want to bag at this time.
Why would I want to "bag" this here?
Because the future upside, at a share price of close to $160/share, is actually starting to look somewhat meager. When I wrote my last article, I went for a "BUY" rating with a continued PT of $150/share. Please note the share price that I am writing this article at. Just because the price goes above this does not immediately mean I rotate or trim. Such an approach would be foolish.
However, for a non-dividend-paying stock to go $10/share above this, I would say things should be coming to an end here.
A conservative 15x P/E on a forward basis gives us the following return thesis.
Granted, given premia, we shouldn't be forecasting ROG at 15x. But it's a healthy exercise because it shows us the potential of literally losing money even if the company isn't being terribly valued by the market.
However, even at a premium of 20-25x P/E, we're seeing annualized rates of return starting at 3% and going to around 12%. That's not something I'm looking for when I'm investing in a stock that does not pay me any dividends.
Add to that that analysts have a relatively high failure rate of 30-40% here negatively with a high margin of error, and the neutral "HOLD" thesis for Rogers starts to materialize with more and more clarity here.
Even if this company had paid a dividend, I would probably have said at this point that the market dictates it's time to get out of this investment. Rogers is a great company, and I look forward to seeing what can happen to it this year, but the time to "BUY" it is when it's undervalued.
S&P Global gives the company averages starting at $205 and going to $215. However, I wouldn't give these much credence, because these are the same two analysts that have followed the company since the failed M&A, and that failed to recognize the buying potential back when a share cost investors double digits.
When an analyst completely fails to recognize something like this in a company they cover for years, I say it's time to look for another analyst. Not even at below $100/share or close to it, did these analysts shift their rating to a "BUY".
For that reason, I trust my own work with Rogers more - and this is my current thesis for the company.
It contains a thesis change - to "HOLD".
Thesis
My thesis for Rogers is as follows:
- This was an undervalued play following a failed merger with DuPont, in specialty materials and engineered components/substrates for various attractive end uses and industries. This sort of company typically deserves a premium - and if the company had size, a credit rating, and yield, it would have deserved more. For now though, Rogers is valued at a too high level compared to what else is available and its lack of a dividend.
- As it still stands in 2023, I'm willing to give the company a 15x normalized P/E as an introductory price target. This comes to a PT of $150/share, and I am not changing this price target at this time.
- I work with a rating of "HOLD" here - so this represents my thesis change on Rogers corporation.
Remember, I'm all about :
1. Buying undervalued - even if that undervaluation is slight, and not mind-numbingly massive - companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.
2. If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.
3. If the company doesn't go into overvaluation, but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.
4. I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.
Here are my criteria and how the company fulfills them ( italicized ).
- This company is overall qualitative.
- This company is fundamentally safe/conservative & well-run.
- This company pays a well-covered dividend.
- This company is currently cheap.
- This company has a realistic upside based on earnings growth or multiple expansion/reversion .
While it has an upside, it lacks a dividend and is no longer cheap. I change my rating to a "HOLD" here - and I'm selling my holdings.
For further details see:
Rogers: After A 54% Rate Of Return Since November, I'm Done For Now