In May, Atkore (NYSE: ATKR) posted strong second quarter earnings results. Atkore posted diluted EPS of $4.87, beating consensus estimates. Additionally, management increased the full-year adjusted EBITDA outlook to $1,015 - $1,065 million and the full-year adjusted diluted EPS outlook to $17.45 - $18.35 per share. With these impressive second quarter earnings results in mind, we took a dive into some of the reasons why many investors are bullish on Atkore.
Atkore, headquartered in Harvey, Illinois, is a prominent player in the manufacturing industry, specializing in electrical products for non-residential construction, renovations, residential markets, and safety & infrastructure products for the construction and industrial sectors. Within the Electrical segment, the company produces conduit, cable, and installation accessories used in electrical power system construction. This segment primarily caters to contractors through collaboration with the electrical wholesale channel. The Safety & Infrastructure segment focuses on designing and manufacturing solutions for critical infrastructure protection and reliability, such as metal framing, mechanical pipe, perimeter security, and cable management. These solutions find their way to contractors, original equipment manufacturers (OEMs), and end-users. Across a wide range of products, Atkore maintains leading market positions in the United States based on net sales. The company's competitive edge is driven by the exceptional quality of its products, strong brand recognition, extensive scale, and large national presence.
Atkore’s business relies on customer demand from various sectors, including wholesale distributors, OEMs, retail distributors, and general contractors. The primary utilization of their products occurs in the construction and renovation of non-residential structures such as commercial office buildings, healthcare facilities, and manufacturing plants, primarily by trade contractors. In the previous fiscal year, the majority of Atkore’s net sales, around 91%, were generated from customers within the United States. Consequently, the overall health of the United States economy, as well as non-residential construction activity, significantly affects their business. Stronger economic conditions and robust non-residential construction generally result in increased demand for their products.
During the previous fiscal year, Atkore’s sales and cost of sales were influenced by high raw material prices. Since they typically engage in spot sales, they were able to pass some of these price increases on to their customers. Furthermore, they observed a rebound in their business as the broader economy recovered from the impact of the COVID-19 pandemic, with their customers resuming operations at pre-pandemic levels. Management identifies two key economic indicators that influence their business and product demand: United States gross domestic product (GDP) and non-residential construction starts measured in square footage. The non-residential construction market in the United States has experienced moderate growth in alignment with the country's GDP. As a result, their historical performance has been positively impacted by the growth in non-residential construction, which drives higher demand for their products.
During challenging economic or construction cycles, maintenance, repair, and renovation (MR&R) activities tend to increase and account for a larger proportion of non-residential construction projects. Consequently, during these periods, the demand for their MR&R products typically rises in relation to total demand, providing a more consistent revenue stream for the business. This makes Atkore a compelling play as the US Economy rebounds from its post-Covid state. With data from CBRE signaling record high construction starts in 2022, there is plenty of non-residential construction spend opportunity for Atkore to capture in the next year or so as around 50% of non-residential construction spend occurs in the second year and beyond of a project’s timeline.
Looking at Atkore’s Income Statement, we can see stellar sustained growth in revenue, gross profit, EBITDA, and EPS. Additionally, we can see spectacular margin expansion over the past few years. Atkore has grown its revenue at a CAGR 10% in the last 10 years and gross profits at a CAGR of 22% in the same time frame. The large increases in gross profits over the last 10 years can be largely attributed to spectacular margin expansions. In 2013, operating margins were at 2.3% and gross margins hovered around 14%. Today, LTM operating margins are now at 29.3% and LTM gross margins are at 40.7%, an incredible display of operational efficiency. From 2013-2015, Atkore posted negative EPS. In 2016, they first recorded a positive EPS figure of $0.94. From 2016 to today, Atkore has grown its EPS at a CAGR of around 55%. This large increase in EPS can largely be attributed to the cannibalistic nature of management’s stock buybacks. From 2015 to today, total shares outstanding has been cut from 62.46 million shares to 38.56, a 38% decrease in total shares outstanding. Additionally, EBITDA growth has been healthy as well. Over the last 10 years, Atkore has grown its EBITDA at a CAGR of around 30%.
Atkore runs a very efficient business, with LTM ROE and LTM ROIC of 69.7% and 50.5%, respectively. With expanding margins and increasing profits, Atkore can reinvest their profits back into the business very efficiently and at a high rate of return, rapidly compounding its intrinsic value.
Looking at Atkore’s balance sheet, we see a very healthy company. Atkore currently has around $354 million dollars worth of cash and cash equivalents on hand, paired with around $762 million dollars worth of long-term debt. The company operates at a very healthy cash to long-term debt ratio.
Looking at Atkore’s Cash Flow Statement, find a healthy net income and free cash flow growth, along with expanding free cash flow margins. Atkore posted negative net income from 2013-2015, with the first positive net income reading coming in 2016 at $58.80 million. With LTM net income at $822.80 million, net income grew at a CAGR of around 46% since 2016. Additionally, free cash flows have grown at a CAGR of around 45% in the past 10 years. This spectacular growth in free cash flow can largely be attributed to expanding free cash flow margins. Free cash flow margins have expanded from 1.4% of revenue in 2013 to 22.1% of revenue.
Looking at valuation metrics, Atkore is trading at what seems to be fair value for the company, however, it could be argued that fair value is much higher based on growth prospects and future financial metric growth. Atkore is currently trading at a NTM P/E ratio of around 9.43x, slightly below the all-time mean NTM P/E ratio (since the stock went public in June of 2016) of 9.86x. Additionally, Atkore is trading at a NTM Levered Free Cash Flow Yield of around 10%, slightly below the all time mean (since the stock went public in June of 2016) of 11.7%. However, the all-time NTM Levered FCF Yield would likely be much lower if not temporarily boosted by the pandemic sell-off (Atkore traded briefly at a Levered FCF Yield of around 25% during March of 2020, and traded at an all-time high Levered FCF Yield of around 50% during July of 2020, messing up historical metrics).
One compelling growth case for Atkore is rooted in the acceleration driven by regulatory pressure and customer expectations to combat climate change. This momentum will help spur a shift towards renewable power generation, the electrification of buildings and transportation, and the adoption of more sustainable construction methods within their markets. Simultaneously, the rapid expansion of digital technologies is expected to fuel the demand for enhanced digital infrastructure, including data centers, as well as advanced warehousing and distribution centers to support the flourishing e-commerce sector.
Atkore, with its extensive range of products, is strategically positioned to meet these evolving market needs that are anticipated to drive an increased demand for Atkore products.
In the past, Atkore has not relied heavily on information technology as a distinguishing factor in their markets. However, management recognizes that enhancing the ease of doing business with them will play an increasingly important role in their growth. As a result, they are making substantial investments to enhance their operations and deliver valuable solutions to their customers. Over the past six years, Atkore has made significant strides in technology investments, aimed at improving their business processes and providing added value to their customers.
Currently, their operations are supported by commercially available hardware and software products that offer robust support services. Alongside these established IT solutions, they have developed a new application for their agents to enhance the overall order entry process. Furthermore, in fiscal year 2016, they made significant investments in implementing a new general ledger and financial reporting system across the entire company, replacing multiple systems used in different areas.
To further optimize their IT infrastructure, they have made the strategic decision to migrate their email service and other information technology services to a cloud computing platform hosted by Microsoft. In fiscal year 2019, they successfully implemented an integrated system for order management, advanced warehouse management, finished goods inventory management, and accounts receivable.
Additionally, they are currently in the final stages of a customer-facing technology investment aimed at streamlining the process of designing installation plans, ordering products, and managing the entire process through delivery. This investment enables them to offer unmatched speed and accuracy that gives them a competitive advantage over their competitors.
Through these concerted technology investments, Atkore is improving their operational efficiency, enhancing customer experience, and positioning themselves for continued growth in the market with the establishment of a strong competitive advantage.
Looking at Quiver Quantitative’s alternative data, we can see several large financial institutions and asset managers that have been adding to their holdings of $ATKR shares. On Quiver Quantitative’s Institutional Holdings Dashboard, we can see that asset managers and large institutional investors like Fuller & Thaler Asset Management, Invesco, and Dimensional Fund Advisors have all added to their $ATKR positions (as filed on 03/31). For example, Fuller & Thaler Asset Management increased shares held by 10% (as filed on 03/31), bringing their total $ATKR position to 1,168,424 shares worth around $177 million dollars at current market prices. You can check out all of Atkore’s recent institutional holdings data here.
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