2023-07-16 07:16:04 ET
Summary
- Tecnoglass has delivered stunning performance with shares rising as much as 25-fold from their pandemic lows.
- I think the bull case has fully played out in the near-term.
- Shares still appear cheap on an earnings basis, however I expect profit margins will fall once housing demand starts to dip.
Tecnoglass (TGLS) is Colombia's leading producer of windows and architectural glass. It came public via SPAC way back in 2013, long before SPACs had their boom and bust. Shares did absolutely nothing up through the pandemic, generally trading a little south of the $10 SPAC price. During 2020, they dumped to $2.
I made a bullish call Tecnoglass shares at $5 later in 2020 and then sold for a triple. Talk about selling prematurely. I badly underestimated just how strong the ensuing housing/construction materials play would be, as shares ultimately topped $30 by late 2021.
The company's 2021 rally ended abruptly following a Hindenburg Research report dredging up a lot of dirt on the company's management team from the 1980s and 1990s.
That was all fine and well, but there's an important thing to realize about Colombia. The country was in a civil war until about 15 years ago. Prior to that, many Colombian businesses had ties to unsavory folks. People probably shouldn't base an investment decision on a Colombian asset on anything that happened in the country's Civil War era.
In any case, the Hindenburg allegations temporarily stopped the run-up in TGLS stock, with the stock falling as much as 50% from its 2021 peak. The stock spent most of 2022 in the $20s, but the mood has changed since then. Let's zoom in on the chart over the past year:
Since the company's breathtaking Q3 2022 earnings report , the stock has been going straight up.
Why Tecnoglass Has Succeeded
Tecnoglass today is expanding greatly, taking advantage of a large export market in Florida and other nearby states. The company's success is in large part due to discovering a unique comparative advantage. Due to Colombia's tendency toward running a trade deficit with North America, ships often return to the U.S. from Colombia empty. This meant Tecnoglass could get favorable shipping rates for its products since they are replacing what would be empty trips.
Tecnoglass built its primary manufacturing facility right next to Colombia's main Atlantic Ocean port. It also operates in the city of Barranquilla, which has a large labor pool and relatively low wages. This makes the company capable of benefitting from the current surge in manufacturing for goods aimed at the North American market. Throw in some patented intellectual property around hurricane-proof windows, and Tecnoglass has built a solid business.
It's important to note that Tecnoglass is not really a Colombian stock in the macro sense. A chart of Tecnoglass compared to the Colombian ETF should confirm this point:
Simply put, Tecnoglass has delivered a more than 500% total return over the past five years, whereas the Colombian ETF has lost a third of its value.
Tecnoglass: Not Too Exposed To Colombian Political Risk
I believe this is a logical market reaction. Most of Tecnoglass' revenues come from the U.S., and it is far more tied to the housing cycle than anything to do with local Colombian politics or macroeconomic conditions.
Tecnoglass is also involved in making glass and coatings for solar panels, and thus the left-wing Colombian President, Gustavo Petro, has said nice things about the company. It will be fine regardless of what happens in Colombian politics over the remainder of President Petro's term.
Further to that point, I believe Tecnoglass has done a good job building community and popular support in Colombia. Note the picture used at the top of this article, which is of the Ventana al Mundo "Window to the World" monument in Barranquilla, Colombia, near the company's key factory. Tecnoglass donated this artwork to the city in 2018 in conjunction with the city hosting the 2018 edition of the Central American and Caribbean Games.
The business is one of the largest employers in the Caribbean region of Colombia, and is well-known at a national level. One of the firm's founders, Christian Daes, has a remarkable 254,000 followers on Twitter as of this writing. Several leading politicians and presidential candidates have visited Tecnoglass' factory or otherwise commented about the company publicly.
That includes the country's current president, Gustavo Petro, who tweeted in 2021, reacting to a photo of Tecnoglass ringing the Nasdaq bell, (translated):
"Congratulations to Tecnoglass, I hope it is an entrepreneurial leader in the industrial transformation of Colombia towards decarbonization and clean energy."
This is a stark contrast from President Petro's unfavorable comments about other major Colombian companies, such as some the country's leading banks and financial institutions.
The Issue Going Forward: Potentially Softening Profit Margins
As the above section has shown, there is good reason for not lumping in Tecnoglass with all other Colombian equities. For one, the current left-wing government should be expected to have a favorable outlook toward Tecnoglass, whereas it has taken a less conciliatory view toward oil, mining, and banking interests.
For another, Tecnoglass' primary market is through sales to foreign markets, primarily the United States. That's in stark contrast to something like a Colombian bank, whose outlook is primarily tied to its domestic economy.
So, I understand why the market hasn't assigned any seeming political risk factor to Tecnoglass shares. That said, at some point, even if you treat Tecnoglass as a developed market company and ascribe it the same valuation as you would a U.S. firm, there has to be a roof to the valuation. And I think we're fast nearing that point, at least in the near-term.
For one thing, insiders are trimming their position. The trust that controls the company filed to sell two million shares of Tecnoglass stock in May at an offering price of $43 per share. After holding those shares from the low single digits up this far, and through a massive short seller report, it's notable when insiders decide to take some chips off the table.
The stock may still seem optically cheap at 13 times forward earnings. However, I believe the firm is currently overearning due to the massive demand for windows (and virtually all other building materials) that we witnessed in the wake of the pandemic. In a market where homebuilders were waiting up to six months for product, there was plenty of room to push customers on price.
To that point, Tecnoglass' gross margins skyrocketed:
You can argue that some of this increase is permanent due to economies of scale, better brand recognition, and mix shift toward more favorable single-family housing products. That said, I find it hard to believe that a firm whose gross margin was typically in the low 30s will now print greater than 50% margins indefinitely.
The Miami housing market has been one of the hottest in the country. Florida benefitted in particular from regional migration trends, thanks to its favorable weather and low taxation during the remote work era. The boom in cryptocurrency also attracted a great deal of new capital and residents to the Miami market.
I do not expect the boom in Miami to last forever, though. The return-to-office trend is likely to drag at least some folks from Miami back toward other cities. In addition, the crypto market has lost steam, which will dampen marginal demand from that subset of potential Miami home and condo buyers.
I'd note just how dramatic Tecnoglass' profitability increase has been as well:
Over the past five years, Tecnoglass has grown revenues 120%, while growing net income nearly 1,200%. Sure, the stock looks cheap on a trailing earnings basis today. But that assumes that this massive uplift in net income will be a permanent feature. I'd be much more inclined to assume a fair chunk of the excess profitability we've seen over the past two years is given back when the housing market cools and/or a recession hits.
Tecnoglass shares were trading around $8 prior to the onset of the pandemic. Revenues have more than doubled since then, and the firm has established a stronger brand and economies of scale. It's not difficult to argue that the firm should be worth at least three times as much as it sold for in 2019, perhaps even a bit more than that. However, a share price up here in the $50s seems fairly ambitious.
Tecnoglass Stock Bottom Line
I've been a Tecnoglass shareholder in the past, and I'd like to be one again in the future. As a Colombian resident, I highly respect what the firm has accomplished for the economy, and I hope more entrepreneurs follow their lead and create businesses that lead to strong employment and incomes in our region. I particularly admire the ingenuity in taking advantage of the firm's unique location to carve out a defensible moat in an industry that is known for being highly competitive.
I look forward to being a shareholder again someday in the future. Right now, however, I think investors can get Latin American (and also housing market) exposure at more attractive risk/reward profiles in other equities.
To be bullish on shares up here in the $50s, it requires some fairly optimistic assumptions on the demand for Florida housing and Tecnoglass' ability to maintain sharply improved profit margins. I expect shares to retest the level where insiders recently sold stock, that is to say $43, and perhaps move even lower depending on the severity of the slowdown in the housing market.
Tecnoglass has delivered tremendous results. However, I worry that we're near the top of the near-term cycle and that shares aren't nearly as cheap as they currently appear to be.
For further details see:
Tecnoglass: Shares Fully Valued As Potential Slowdown Looms