2023-08-23 07:00:16 ET
Summary
- Tecnoglass Inc's a backlog of nearly $800 million, paired with a production capacity increase, might contribute to significant growth.
- The company's single-family offerings are gathering pace amid sound regional targeting by the firm.
- A potential opportunity exists for expansion in Colombia.
- Key valuation metrics imply that Tecnoglass is a GARP opportunity.
Tecnoglass' (TGLS) stock remains under the radar, and I am not quite sure why, as the Colombian-U.S. architectural glass manufacturer possesses numerous tailwinds; moreover, its stock is supported by various market-based factors.
However, Tecnoglass' semi-underfollowed status means it hosts numerous unpriced characteristics, leading to a valuable opportunity for investors.
Here are a few of our latest findings on Tecnoglass' stock.
Backlog and Increased Production Capacity
Tecnoglass is experiencing secular growth, with the claim substantiated by observing the company's increasing backlog and recent production capacity expansion.
As communicated by its second-quarter results, Tecnoglass has a backlog of $797 million, which has increased by 19% year-over-year. About a third of the backlog consists of short-term projects, while the remainder relates to high-rise buildings. As such, a third of the revenue will likely settle in the next few quarters, whereas the high-rise projects might settle on a "paid on completion" basis.
Further, Tecnoglass is in the midst of increasing its effective production base by 40% (versus its trailing twelve-month earnings) , which will allow the company to achieve approximately $1 billion in annual sales to satisfy its intensifying demand. We await further details on the exact date of completion and precise capital outlay; nevertheless, eyeballing the matter implies an extension of Tecnoglass' growth story.
Expansion Into Single Family
Another catalyst for future growth is Tecnoglass' progress in the single-family residential market. The company is taking advantage of the high demand for renovations in pockets within the U.S. and Latin America.
The diagram below illustrates the company's end market for single-family offerings.
According to its second-quarter results, Tecnoglass' single-family unit grew by 15% year-over-year to reach $86.9 million. The firm's dealership growth, coupled with sound underserved market targeting, is really starting to pay off. In isolation, the unit's growth might not seem like a gamechanger; however, it diversifies Tecnoglass' revenue mix and allows for potential synergies relating to costs and cross-sales.
Top-Down Factors
In our view, Tecnoglass' niche market exposure and substantial execution mean it is a secular growth company that has the ability to produce robust results throughout the economic cycle. The diagram below somewhat substantiates my claim, as it displays the company's exponential compound annual growth rates (CAGRs).
According to CSI Market, Tecnoglass holds down approximately 23.15% in cross segmental market share. Its strong position in the market is accompanied by a forecasted 5.6% CAGR (until 2028), suggesting that perpetual growth is possible.
A final observation for this section pertains to forecasted Latin America growth.
Tecnoglass currently derives 95% of its sales from the United States and 5% from Latin America. Suppose Colombia's (where the company was domiciled before it moved its HQ to the U.S.) trend growth pans out the way it is forecasted. In that case, Tecnoglass will likely have an opportunity to diversify its end market into a prospecting zone with future growth prospects.
Colombia is in an industrialization process, and we see multiple opportunities on the horizon, especially relating to high-rise buildings.
Valuation & Dividends
Valuation
The first thing that struck me when I opened up Tecnoglass' valuation metrics on my screen was the stock's forward price-to-earnings-growth ratio of 0.37x.
The PEG ratio is a parsimonious indicator of a stock's "growth at a reasonable price" prospects where its P/E ratio is stacked up against its earnings-per-share growth.
As a rule of thumb, a PEG ratio below 1 suggests a stock presents a GARP opportunity. Although other factors must be considered to consolidate the argument, the PEG ratio provides a lot of substance.
Extending the valuation analysis into an absolute valuation vantage point presents additional encouragement. I used the expanded PE model and discovered a December 2023 stock price target of $49.59.
As with the PEG ratio, the extended PE model is heuristic at times. Nevertheless, it provides solid guidance.
Herewith is the formula,
Price Target = 5-Y Average PE x EPS Estimate for December 2023 = 11.78 x $4.21 = $49.59
Dividends
Tecnoglass' dividend profile is respectable, with a forward yield of 1.06% accompanied by consecutive years of growth. However, I do not think we are looking at a dividend growth opportunity here as high sector CapEx growth ( 19.33% ), and expansion of Tecnoglass' production facility conveys that the firm has high return investment opportunities available, which could see it invest internally instead of focusing on dividend distributions for now.
Noteworthy Risks
One of Tecnoglass' primary risks is its sensitivity to market risk. The stock's beta coefficient of 1.806 is elevated compared to the broader market. Moreover, its % monthly Value-at-Risk of 16.85% suggests that the stock tends to draw down by approximately 16.85% in 5% of its traded months.
Another risk worth considering is Tecnoglass' debt maturity schedule. Sure, the firm's cost of debt is on a long-term decline; however, its debt is short-term structured, with its current maturities scheduled no later than 2026. Short-term debt means a company will recapitalize frequently, leading to unknown capital structures and plenty of variable-rate debt.
Final Word
Although a risky bet, we believe Tecnoglass presents a splendid GARP opportunity. The company's humongous backlog and impressive efficiency metrics offer much to be optimistic about. Moreover, a valuation analysis communicates that much of the stock's attributes are yet to be priced by the market.
For further details see:
Tecnoglass: Massive Backlog Supported By Operational Efficiency