2023-08-23 09:00:38 ET
Summary
- Uponor is a water company that has delivered a massive return on investment, almost 4x the market RoR.
- The company offers water delivery/plumbing and heating/cooling solutions for commercial and consumer markets.
- Despite volatile trends, Uponor's top-line results have remained solid throughout the COVID-19 pandemic, and the company is undergoing a transformation in its building solutions segment.
- The company is a "HOLD" here and should not be bought. It's being sold, which makes this more of a final interest article for shareholders.
Dear readers/followers,
Uponor (UPNRY) (UPNRF) is a company I've written about a few times before. The last time I wrote about it the company was at overvaluation - however, I've been positive for a very long time. And since I gave you my first statement on Uponor, the company's performance has resulted in absolutely massive RoR - almost 4x the market RoR over the same time.
To say this is a good return is of course a bit of an understatement. Also, it's a water company - and you know from my previous articles that water companies are the sort of companies I want to be investing in, and looking for. Water companies or companies which in some way work with distributing, cleaning, or providing water-related services are usually some of the more overvalued companies on the market. Uponor has gone up again since dropping back in late 2022 - so it's still not necessarily buyable, but we'll take a look at what the company offers here.
So, let's review - and also why the company won't be investable going forward.
Uponor - A water company with a good upside, but no longer an option
Uponor is an investment I've made twice now. I sold off when the company delivered on the upside that I expected it to, only to buy it back when the company dropped back down. We're now up, and this is due to the company being sold (more on that in this article).
First off, a water company or a company that works with various operations in the segment. Not your typical regulated water utility, but instead a company in various industrial segments related to water. It's been international for almost 40 years, with a large part of the company being US operations. However, the company itself, that's been around for 100 years since started by a carpenter back in 1918.
The company invented the first multi-layer composite pipe (MLCP). And by the way, this is a patent the company still holds. It also came out with MLCP press fittings back in 1993 and diversified into more US-based production as late as 2017 and beyond when demand continued to outstrip the company's ability to manufacture.
So, what exactly beyond pipes and pipe fittings does Uponor deliver to its customers?
The company delivers water delivery/plumbing and heating/cooling solutions for both the commercial and the consumer market. The company is also active in municipal water delivery, as well as on the state level, delivering key infrastructure solutions for state-wide or city-wide water solutions.
This company has a more volatile trend than you might expect from a company that works with water, owing to its correlation to industry, manufacturing, and overall raw material trends. However, despite these volatile trends, the company's top-line results have remained solid throughout the entirety of the COVID-19 pandemic and beyond. Here is how sales look on a half-year basis.
The group's correlation to the European construction sector is not to be underestimated. CPI and builder confidence trends do impact Uponor sales, and key construction activity has declined in almost every nation in Europe relevant to Uponor. Here is the latest data, from the company's own numbers.
Despite this, as you'll see when we look at these trends, company results and valuation has actually stayed surprisingly strong. That doesn't mean the company has stayed inactive as these trends has taken root. Uponor is in the midst of a transformation in its building solutions segment, with key changes made in the manufacturing footprint to make things more flexible and overall efficient.
Uponor Infra, or infrastructure, is also seeing declining sales, but this is mostly due to the divestment of certain businesses, closures of factories, and overall market activity seeing a decline. The segment still had a good mix and several successful projects. Adjusted for structural changes as well as with changes included, the segment actually did well, and went up significantly in terms of profit on a sequential basis.
That's Uponor infra alone, mind you.
USA/NA is actually the highlight here. As of 2Q, the company is communicating that we're seeing signs of recovery in the US market. Building starts are down around 1% YoY but were seeing an increase in the residential segments and the housing market index - a 6-month increase after what was a 12-month fall. With interest rate increases driving mortgage and monthly payments up, things are still expensive, but the degree of increase and growth is now.
In fact, not that long ago, Uponor saw a very massive increase in its valuation, which we'll speak to more in the valuation portion of the article. It's what made the company basically uninvestable here (for several reasons), and is why I've actually already rotated my stake at top dollar, but it still pays to look at these recent results to look at what you may get, if the deal does not, in the end, go through.
The NA segment did very well. The company's operating profit in the segment as at margins of close to 20%, with solid net sales above €100M. This was thanks both to demand generation activities in US/CAn, but also moving into commercial and non-resi markets in NA. Pricing discipline and LEAN introduction as well as transformation here as well are key reasons for why the company has seen outperformance.
The company's new management structure and operating model is a positive one.
And the aforementioned transformation program is very much within budget and already delivering an overall headcount reduction. €16.7M in expected annualized savings are completed by the end of this quarter, with another amount of the same size expected by year's end. Comparative margins are improving. While the amount of profit is down , the margin is up by 40 bps. Whenever a company can show me that it makes more money per euro or dollar than before, it's easy for me to swallow a bit of profit decline.
It's because, for me, the business model is more important than the amount of top-line sales a company makes. Sales can be generated - but if the business model fails to generate profit, or as much profit as I am looking for, no amount of sales can save it. 0% margins are $0 net profit, no matter if you sell $10 worth of widgets or $100B worth of widgets.
So, Uponor is a very impressive company and one that I am happy to invest money in at the right price. I did so, investing about 0.8% when it was low. And when it climbed back up like a rocket a few months back, and I was sitting on about 1.3% of my portfolio in Uponor, I made the decision to start trimming that position. When the announcement came in June of Georg Fischer at a price of €28.85, I sold what remained of my stake in the company.
Uponor is one of the most solid Finnish Industrials I've seen. Take a look at the company's interest-bearing liabilities on a net level, as well as the gearing level, and you'll see why the company's comparative cash/debt is so favorable.
I'm going to be looking, probably a final time, at the company's valuation here,
Uponor's valuation - The upside is non-existent on any conservative or logical forecast due to the sale
So, Uponor is being sold. I'm actually not at all thrilled about this, even if the opportunity to make 50-60%+ in a short timeframe is great, but the fact is that the sort of cash position that I am left with is as much a problem as anything else these days. I've had this happen before - finding and investing in some of the best companies out there (as I saw them), only for someone with actual capital to think the same and buy it up, forcing me to divest. Norwegian company Data Response comes to mind. I made over 100%+ RoR, but I would much rather have kept the company's shares and even bought more at cheaper valuation.
Here is how things look in terms of Uponor's current valuation.
If the sale of the company for some reason does not go through, you're better off waiting for this to actually decline back down. That is also the reason why I went ahead and sold my shares when the details and the price levels were finalized. I also sold about 40% back when the first offer was announced, which by the way was declined at a level of around €25.
I can say with honesty that I would have rather kept my shares in Uponor and seen the company grow over time, but I'm happy enough taking my profits here. I'll have to look for targets to reinvest some of the capital I still hold from the sale. Due to unfavorable FX, I'm slowly allocating at this time - very few big buys and much of it spread out across multiple sectors and investments.
Uponor is/was an investment that I knew where I "had". I knew when to invest, and I knew when to sell.
Unfortunately, going forward, this will no longer be possible - at least, I consider the sale extremely likely to go through.
Here is my current, and final thesis on Uponor.
Unless the sale doesn't go through, this will be the last time I cover Uponor.
Thesis
- Uponor is one of the more interesting water companies and industries out there. I've invested in this Finnish, sub-€2.5B market cap company twice in my investment career. Both times, I've come away with more than triple digits in a very short timeframe, comparatively. My latest sale was less than 2 months ago for the business when the announcement of the sale seemed clear.
- The current valuation and the news of the sale of the company make investing in Uponor not something to consider here. If you invested, you ought to be congratulated.
- If not, then this is what can happen to a qualitative company, and this is why I prefer to invest in quality.
- My final rating for Uponor is a "TRIM" or "HOLD". The company is being sold, and you should consider selling your shares, or if you prefer, hold and wait for the offer to be finalized and gone through.
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.
Uponor is being sold. It's time to exit this investment or to "HOLD" and wait for the deal to be finalized and go through.
For further details see:
Uponor: An Update After 3 Years, 200%+ RoR, Selling Again Before The Sale