PGTI
(PGT Inc.): The High Impact of Implementation
By:
Eric Christopherson, student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
• PGT, Inc. manufactures and supplies residential impact-resistant windows and doors in the Southeastern United States, the Gulf. PGTI is in the final
phase of their ERP implementation, a major source of negative sentiment for
2015.
• The acquisition of
WinDoor on November 30, 2015 is expected to close in Q1'16 with synergies between the
two companies to follow. The market has not yet recognized the potential synergies.
• Management released
financial metrics for the acquisition of WinDoor with net income accretion
within 12-18 months.
• PGTI could be looking
to hit a new 52 week high for 2016 during the summer months, but labor expense
and implementation issues could hinder this.
PGT
Incorporated (NASDAQ: PGTI) is looking to have a strong year for
2016 after some rough patches in 2015.
These rough patches can be attributed mainly to the botched
implementation of PGTI’s ERP system. The
company experienced difficulties with the sequencing portion of the Insulated
Glass implementation, which in turn, negatively affected third quarter
operations. Higher the normal direct
labor rates were achieved due to the difficulties with production being reduced
as well.
In a business update from
December 9, management indicated that it had reached the final phase of their
ERP implementation with the support and main glass processing departments fully
integrated. Seventy percent of insulated
glass units have been converted and 45% of assembly units have been converted
and are the only areas that need to be worked on before the system can be fully
implemented.
Financial metrics for the
acquisition of WinDoor were also included in the business update for PGTI. WinDoor provides impact-resistant windows and
doors for five-star resorts and luxury hotels and will become a wholly-owned
subsidiary after the expected close of the deal in the first quarter of 2016. WinDoor’s 2015 revenues are expected to be
$41 million with $8-9 million in EBITDA.
Management has said that PGTI will see immediate accretion in earnings
on an operating basis with net income accretion within 12-18 months. PGTI has acquired a strong, recognized brand
in WinDoor and looks to gain from a diversified set of products from the
acquisition.
PGTI will greatly benefit
from their acquisition of WinDoor and will look to see this benefit on their financial
statements for 2015 and could be looking at new highs on the stock chart. However, there are some problems that could
hinder this outcome. If there are any
more problems with the implementation of the ERP system, PGTI will feel the
negative backlash on the stock chart. PGTI
is also looking at higher than normal labor rate expenses, which even reached a
high of 14% in 2015.
What
has the stock done lately?
Over the past year, PGT’s
stock has seen its ups and downs, but the stock is up 24% from $8.94 to
$11.78. This large increase can be
attributed to the performance of the company and the increases in revenues. PGT’s stock chart shows that the company hit
a high over the past year in the summer at $16.06, but fell off going into the
end of the year. The 24% increase still
looks good, but the company may be looking to their newest acquisition to help
move the stock up to more consistent levels.
Past
Year Performance:
While PGT has seen a
stock increase of 24% over the past year, the stock is not looking to be at a
bargain at the moment. Consensus
estimates have put a hold on the stock with price targets ranging only from
$12-13. The performance of the company
was severely hindered by the botched implementation of their ERP system, but if
things go well, PGTI can rebound in 2016 and see their stock numbers go up.
Source: FactSet
My
Takeaway
PGTI
has a lot of good things going for it right now, but it’s hard to say whether
this is a hard buy at the moment. The
integration of WinDoor as a subsidiary company will have a major impact on the
financial statements for 2016 and will look to be a main driver for the
company. The efficiencies guaranteed by
the ERP system will also have to come to fruition in 2016 if the company is to
combat their high direct labor rates they experienced in 2015. While the past quarter has been challenging, if things go well, PGTI could be looking at a
new 52-week high, but one can never be so sure and the stock will have to be
watched carefully - however, the long-term view is clearly positive.
