2023-06-15 12:16:55 ET
Summary
- Tecnoglass stock is up nearly 150% in the past year.
- The architectural glass company should continue to benefit from the tailwinds of the favorable urbanization trend.
- Its end market has been holding up well as commercial construction spending continues to see excellent momentum.
- The latest earnings were extremely strong while the valuation remains discounted on a historical basis.
Investment Thesis
Tecnoglass ( TGLS ) has been one of the best-performing companies in the past year, with shares up nearly 150% during the period. Despite the massive rally, I still believe the company presents a compelling investment opportunity.
The company operates in the large and growing architectural glass market, which continues to provide meaningful tailwinds amid the favorable urbanization trend. Its end market has also been showing great resilience thanks to the strong momentum in commercial construction spending, which should provide solid support for demand. While the latest earnings were extremely strong, its valuation remains discounted on a historical basis. I believe Tecnoglass should have more room to run moving forward.
Favorable Urbanization Trend
Tecnoglass is a leading manufacturer, distributor, and installer of high-specification architectural glass and windows. The Columbia-based company operates in both the commercial and residential markets, with notable customers such as Marriott ( MAR ) and Ernst & Young.
Architectural glass is a mundane yet massive market. According to The Insight Partners , its market size is forecasted to grow from $52.6 billion in 2022 to $75.8 billion in 2028, representing a solid CAGR (compounded annual growth rate) of 5.6%. The market expansion is mainly driven by ongoing urbanization, as people continue to move from rural areas into urban cities. In 2020, around 82.7% of the total US population lived in cities, up 190 basis points from 80.8% in 2010, as shown in the chart below. The figure is expected to continue its rise and reach 87.1% in 2040, according to Statista .
The rising population in cities continues to increase the need for modern commercial buildings, apartments, and other recreational or public facilities. This subsequently drives the demand for architectural glass, as most modern architecture requires a substantial amount of glass and windows. Urbanization is a major long-term trend in the US and should continue to provide solid tailwinds for the company moving forward.
Resilient End Market
Despite the gradual slowdown in the economy, Tecnoglass' end market has been holding up very well. The company currently generates 96% of its revenue from the United States, with 56% coming from the commercial segment and 44% coming from the residential segment, as shown in the chart below. While the demand for the residential side has been pretty weak, the commercial side continues to see excellent momentum.
According to the Federal Reserve Economic Data , the adjusted annual residential construction spending declined 9.8% from $940.6 billion in April last year to $855.2 billion this year, as rising interest rates continue to put meaningful pressure on the segment. On the other hand, commercial construction spending actually grew 23.7% from $104.3 billion in April last year to $129 billion this year, as shown in the chart below. Considering the recent momentum, I believe the strength of the commercial segment should be able to offset the weakness on the residential side and support the demand for Tecnoglass.
Strong Financials
Tecnoglass announced its first-quarter earnings last month and the results came in extremely strong. The company reported revenue of $202.6 million, up 50.6% YoY (year over year) from $134.5 million. The growth was driven by the commercial segment, which grew 65.2% to $111.2 million. The residential segment was slightly softer but still grew 40% to $83.6 million.
The total backlog increased 19% from $651 million to $776 million, as demand remains solid. Thanks to favorable product pricing, the gross margin expanded 830 basis points from 44.9% to 53.2%. This resulted in the gross profit rising 78.8% YoY from $60.3 million to $107.8 million.
The bottom line was also strong, as operating leverage continues to improve. SG&A (selling, general, and administrative) expenses as a percentage of sales declined 280 basis points from 19.6% to 16.8%. This alongside the rising gross margin resulted in the adjusted EBITDA up 89% YoY from $45.4 million to $85.8 million. The adjusted EBITDA margin increased 870 basis points from 33.7% to 42.4%. The net income grew 130% from $21 million to $48.4 million. The diluted EPS was $1.01 compared to $0.44.
The company's balance sheet also remains very healthy with $169.9 million in debt and $128.5 million in cash. This represents a net debt/adjusted EBITDA ratio of just 0.1x, down substantially from 1.6x in 2020.
Discounted Valuation
While Tecnoglass has rallied significantly, its valuation remains compelling in my opinion. The company is currently trading at a PE ratio of 11.5x, which is cheap on a historical basis. As shown in the chart below, the multiple is still near the low end of its historical range, representing a substantial discount of 36% compared to its 5-year median of 18x.
Not to mention the company has been improving its fundamentals in the past few years, with net debt declining and margins continuing to expand. The current valuation presents ample room for multiple expansions, which should translate to meaningful upside potential.
Investor Takeaway
Tecnoglass is one of the more compelling mid-cap companies on my radar. Its massive addressable market provides ample expansion opportunities and the ongoing urbanization trend should present solid tailwinds. Thanks to the favorable backdrop, the company continues to demonstrate outstanding momentum in its latest earnings.
There are certainly risks regarding the slowdown of the economy but so far I am not too worried as the trend in commercial construction spending remains encouraging. The company's backlog should also provide further financial support even if demand were to slow throughout the year. Despite such strong fundamentals and growth, its current valuation remains highly discounted. I believe Tecnoglass has great upside potential and I rate it as a buy.
For further details see:
Tecnoglass: A Compelling Mid-Cap Company With Great Tailwinds