2023-11-01 08:44:51 ET
Summary
- Tecnoglass stock is a strong buy in the construction sector due to its high rate of organic growth and low valuation.
- The company sells windows and aluminum frames and has expanded its production capacity and entered new geographic markets.
- Despite challenging market conditions, Tecnoglass has shown impressive growth in revenues and backlog, outperforming the market.
After my analysis of Green Brick Partners , I continued to delve deeper into my research for standout stocks in the construction sector. My underlying idea remains the same: the sector is shaken by high interest rates, existing home sales at their worst levels since the pandemic, and inflation. When the storm hits, the true sailors emerge, so I believe this is an excellent time to understand which stocks are truly worth paying attention to.
Among REITs, builders, classified ad portals, and real estate agencies, today I decided to focus on a company that is further upstream in the supply chain: Tecnoglass ( TGLS ). I believe that this stock is a strong buy at its current valuation, especially considering its prospects for future expansion. My investment thesis, which I will delve into during my analysis, is primarily based on the fact that the company simultaneously boasts a high rate of organic growth - despite the challenging times - and a valuation decidedly low relative to its fundamentals. Additionally, I believe that Tecnoglass' success is based on competitive advantages that are difficult for competitors to replicate.
The Business Model of Tecnoglass
For those unfamiliar with Tecnoglass, it is a company that sells windows and aluminum frames. The company is headquartered in Colombia, which means that the cost basis is strongly influenced by the fluctuation of the Colombian peso, but over 95% of its revenue comes from the United States.
Tecnoglass was founded in 1984, but three years have been particularly critical in its history: the launch of Alutions in 2007, the acquisition of ESWindows in 2016, and the joint venture with Saint-Gobain in 2019.
With the inception of Alutions in 2007 , the Tecnoglass group began its own production of aluminum frames; the acquisition of ESWindows allowed Tecnoglass to incorporate one of its main US importers and distributors, thereby integrating its business model downstream. Lastly, the joint venture with Saint-Gobain secured the company a significant stake in its main raw glass supplier, ensuring timely and cost-effective supplies.
After all this evolution, Tecnoglass is capable of selling complete window solutions for large high-rise projects in American metropolises, but also of selling individual products for the single-family market. Over time, several types of windows have been developed, positioned in the upper and middle-upper market segment in terms of both technology and price. Tecnoglass' main products include:
- Insulating - Windows usually double or triple glazed, with high thermal insulation capabilities;
- Laminated - High-resistance windows, particularly suitable for skyscrapers and taller structures;
- Monolithic - A type of glass that offers large windows, obtained from a single block of glass, for particularly aesthetic design solutions;
- Low-e - A product designed to reduce the transfer of infrared and ultraviolet rays from outside to inside and vice versa, keeping the interior cool in summer and warm in winter;
- Tecnobend - Glass processed to achieve curved shapes without compromising its strength and physical properties, such as that used by Tecnoglass for the terminals at El Dorado airport in Bogotá.
A Look at the Financials
Below is a table with the financial data that I find most relevant for analyzing Tecnoglass at this time (source: Seeking Alpha, data in $ million).
2017 | 2018 | 2019 | 2020 | 2021 | 2022 | TTM | |
Revenue | 314.5 | 371 | 430.9 | 376.6 | 496.8 | 716.6 | 840.8 |
Revenue growth (%) | 3.11% | 17.97% | 16.15% | -12.60% | 31.92% | 44.24% | 17.33% |
Gross profit | 99.2 | 120.2 | 135.8 | 139.4 | 202.6 | 349.5 | 433 |
Gross profit margin (%) | 31.54% | 32.40% | 31.52% | 37.02% | 40.78% | 48.77% | 51.50% |
Operating income | 34.4 | 47.2 | 58.8 | 65.7 | 117 | 234.4 | 303.1 |
Operating margin (%) | 10.94% | 12.72% | 13.65% | 17.45% | 23.55% | 32.71% | 36.05% |
EBITDA | 55.3 | 70.4 | 80 | 85 | 136.6 | 252.2 | 320.4 |
Net income | 5.4 | 9 | 24.5 | 23.9 | 68.2 | 155.7 | 202.4 |
Cash & Equivalents | 40.9 | 33 | 47.9 | 67.7 | 85 | 103.7 | 104.7 |
Total debt | 224.3 | 242.3 | 259.8 | 224.5 | 199.1 | 178.8 | 172 |
Debt/Ebitda | 4.06 | 3.44 | 3.25 | 2.64 | 1.46 | 0.71 | 0.54 |
Capex | -7 | -13.1 | -25 | -18.3 | -51.5 | -71.3 | -83 |
Cash from operations | 14.2 | -5 | 25.7 | 71.7 | 117.3 | 141.9 | 122.1 |
Unlevered FCF | 41.1 | -17.6 | 33 | 80.3 | 70.4 | 63.4 | 29.3 |
As can be seen, revenues have surged during 2022-23. This is partly due to the natural rebound of the market post-pandemic, but also and above all to the precise choices of the management. In the last two years, the company has heavily invested in its production lines, especially by automating new processes and reducing the lead time for its products.
It's quite interesting to note the growth in profitability, both in terms of gross margin and operating margin. I find it helpful to visualize this data with a chart to better appreciate this evolution, which occurred alongside a significant reduction in debt.
I believe it is genuinely difficult to level any criticism at these results. Tecnoglass has continued to grow, improve its margins, repay its debts, and expand its production capacity. All of this during a pandemic, an inflation boom, a transportation crisis - let's not forget that the company must ship its windows to the USA by sea - and a boom in interest rates that has significantly slowed the development of new real estate projects.
Valuation: Multiples and Important Considerations
Below, I present the main data regarding Tecnoglass's valuation, drawing from the table available on Seeking Alpha.
Looking at the valuation table, one might think that Tecnoglass is experiencing a particularly favorable period, and that the market expects a decline in results in the coming years. Alternatively, it could be that the market is placing heavy emphasis on the price/book ratio and the discounted cash flow, rather than on other multiples.
In reality, there is nothing to suggest that Tecnoglass's results may decline in the coming years. The company has already stated in its latest earnings call that it has a backlog equal to 1.6x its annual sales forecasted for FY 2023, which should be around $830-855 million according to the most recent predictions provided by management. The expansion of production capacity should also be completed in this last quarter of the year, giving Tecnoglass the potential to produce at least $1 billion in annual revenue - according to management's forecasts. There is nothing to suggest an unusually favorable moment, neither in terms of internal variables nor macroeconomic ones.
Moreover, I believe it is not useful to rely on the price/book ratio nor on the discounted cash flow to analyze this stock:
- The price/book value is justifiably above the sector average, given that the return on assets is also higher (see graph below);
- The company has heavily invested in capex over the past few years, and management has stated that capital expenditure in 2024 will be less than half of that in 2023. This variable has disproportionately influenced the ability to generate FCF in recent fiscal years compared to what will happen in the future.
Overall, I believe that Tecnoglass is undervalued at the moment under every relevant metric, and that in the coming years this will become increasingly evident also from the production of free cash flow.
Why I am Bullish on Tecnoglass
My investment thesis is based on three main points:
- The very attractive valuation;
- A series of very appropriate choices by management, including the automation of many phases of manufacturing, increased production capacity, and entry into new geographic markets;
- The market in which Tecnoglass operates is currently experiencing difficult fundamentals, and in the long term, the situation can only improve.
Having already discussed the valuation, I will now examine the last two points specifically.
1. The Management's Strategy is Winning
Tecnoglass's substantial organic growth in recent years has been the result of a series of successful decisions by the company:
- An increasing number of glass transformation operations have been automated, speeding up production and increasing margins. When specifically questioned about this during the latest earnings call, management reported a significant data point: the average lead time has decreased from 10-12 weeks to 5 weeks.
- In Q4 2023, significant production capacity will be brought online, which should allow the company to reach and potentially exceed the threshold of $1 billion in annual revenue. Currently, the company reports running its plants 7 days a week, 24 hours a day, unable to produce more than it already does and sometimes having to make uncomfortable cuts to plant maintenance. The new production capacity will benefit both the top-line and the bottom-line, allowing for increased maintenance interventions and reducing exposure to potential breakdowns;
- Currently, Florida and New York are the main geographic markets for Tecnoglass, but in Q2 2023, the first showroom was opened in Texas, and the company is considering a possible entry into California. Geographically, there is still a lot of room for expansion.
A company that uses its facilities 24/7 in a time of uncertainty for the real estate sector, and that has not yet begun its true expansion phase in central states and the west coast, is a win-win for me. Market demand is present, and the deleveraging of recent years provides room to finance further expansion projects should the need arise.
2. The Sector Can Only Improve From Here
Depending on the different quarters analyzed, the single-family housing market accounts for 30-35% of Tecnoglass's revenues. The company jointly provides data on commercial and multi-family housing, so we can't precisely know how the remaining revenue is divided, but it is prudent to say that at least half of the revenues come from the housing market.
In a moment when 30-year mortgages are touching levels not seen for 16 years, theoretically a company like Tecnoglass should find itself in difficulty. Existing home sales are at the lowest levels of 2020 and new home sales are at 2019 levels, but despite this, Tecnoglass shows an impressive growth rate in both revenues and backlog. At this point, it is natural to wonder what the company will be capable of when interest rates start to drop and the real estate market regains its full growth momentum.
The fact that the company is performing much better than the market is also evident from the chart: below I report a comparison of Tecnoglass's performance against the iShares U.S. Home Construction ETF (ITB), which is a relevant benchmark for a company of this type.
Final Thoughts
Tecnoglass is a rapidly expanding company, with excellent margins and decreasing debt. The demand for its products continues to increase, and it's rather the production that struggles to keep up, despite not optimal fundamentals for the real estate market. In light of all this, considering how attractive the company's valuation is at the moment, I feel confident in starting my coverage with a STRONG BUY rating.
The next quarterly data could be a strong positive catalyst. The company will present data for Q3 2023 on November 6, so I intend to buy the stock in the next few days with 50% of the total capital I plan to invest. The remaining 50% will be invested after the presentation of the quarterly data, whether positive or negative, to mitigate the risk related to the entry price.
Risks to Consider Before Investing
Like every analysis, this one also carries its risks. In particular, I suggest evaluating three:
- The volatility associated with the Colombian peso can significantly impact the cost basis, although the company may decide to intensify hedging efforts if there were concrete fears of a bullish rally of the COP;
- Things for the real estate market could get worse before they get better. If this fear were to materialize, the next quarters could suffer but it would not change my long-term bullish attitude;
- Considering that the company is using its plants 24/7, there is a concrete risk of breakdowns that could cause significant slowdowns in production.
Having said that, I am willing to accept these risks given all the opportunities that the stock presents.
If you want to keep reading some of my analysis on real estate shares that I am buying right now, I suggest reading my article on Green Brick Partners .
For further details see:
Tecnoglass: A Strong Buy Amid Real Estate Woes