PGT Innovations, Inc. (PGTI,
$15.35): “Closing a Window”
By: Jordan Luczaj, AIM 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 Innovations, Inc. (NYSE:PGTI) manufactures and sells both impact
resistant and non-impact resistant windows and doors. They have three brands
that they use to sell their impact resistant products: WinGuard, PremierVue,
and PGT Architectural Systems. PGT has a vast product line and assembles
products using both aluminum and vinyl frames.
·
On
September 22nd, 2017, PGTI sold $28 million in assets to Cardinal
Glass Industries. This was a strategic sale, given that PGTI also signed a
seven year supply agreement with the same company shortly after. Cardinal Glass
will continue supplying the glass components for doors at PGT’s current cost to
produce. This allows PGT to pay down debt and focus more on their core
business, which is window and door manufacturing.
·
Reconstruction
and remodeling make up the other 60% of PGTI’s business. Considering that Florida
represents around 90% of their market, the recent impact of Hurricane Irma is
significant. Management does expect R&R to be up next quarter and possibly
into next year based off of rises in demand due to damages and people’s desire
to refortify their residences.
·
In the
first half of 2018, PGT Innovations will be moving into a new facility in the
Miami area. They are planning on increasing ad expense to possibly gain
exposure here, as this is their first facility. Ideally, they want to
capitalize on the strong labor market in Miami, and be closer to large
customers in both Fort Lauderdale and Miami.
Key points: PGT Innovations has been a steady gainer,
and stands to see a pop in sales due to the increased reconstruction efforts in
much of Florida, especially the Gulf Coast. Their expanding market presence is
moving them closer to Miami-Dade County, which controls a lot of the impact
resistant glass/window regulations. PGTI sees large potential in the Florida
market, and hope to hit 20% EBITDA margins within two years. This is a realistic
goal, since they have attained 19% EBITDA margins, and will add depreciation
upon buying the building in Miami and increasing equipment in the facility they
retained after the sale to Cardinal Glass Industries.
Even though PGTI is focused on Florida,
they have not been shy about making acquisitions and growing in other markets. In
the past, they have made multiple acquisitions that have helped move them into
Canada, where 2.5% of sales now come from. There best opportunity for growth
prospects could be in interstate expansion, especially up the coasts and along
the Gulf where states are affected by hurricanes and natural disasters. They
also could see expansion in tornado alley where there is a need for impact
resistant products. During this year, sales outside of Florida have grown
between 25 and 30%.
Reconstruction efforts are going to
be heavy over the next few years, which should boost sales above expected
levels. PGTI will also continue their vertical integration to gain more control
on lead times and manufacturing processes, which should increase margins. PGTI
is built on a foundation of efficiency and market demand created by regulation
and consumer demand for safety.
Their management team has been strong, but
the CEO is stepping down after 2017. Even though he will continue to act as Chairman
of the Board, this is not ideal given his knowledge of the industry,
relationships with regulators and suppliers, and long-term planning ability.
What has the stock done
lately?
On November 2nd, PGTI missed
earnings and saw about a dollar dip in their share price. The miss was largely
driven by lack of demand given the hurricane filled quarter. Management
projected that there was a $13 million negative impact on sales due to
Hurricane Irma and a few million dollar escalation in expenses related to
complications. The stock did bounce back quickly after earnings, and is now
trading near a 52 week high.
Past Year Performance:
Over the last 12
months, PGTI has been on the up and up, returning 37% during that period. Since
PGTI was added to the AIM Small Cap Equity Fund on April 25th, it
has returned 37.44%. There has been some volatility over the last year around
earnings dates and a large increase in share price correlated with timing of
the recent hurricanes.
Source: FactSet
My Takeaway:
PGTI has sped past
its target price of $13.80 in a little less than seven months. The stock was a sound
play given Florida’s housing demand and strong economy, high margins that are
increasing with efficiency, and a more than competent management team. However,
the stock has far exceeded my expectations mainly due to the effect that
hurricanes had on a majority of PGTI’s market space. I imagine that sales will
grow in 2018 above expected levels, but I wonder if PGTI is prepared for this
uptick and how it will affect their margins and long term plan going forward.
They will also be going through this during a major management transition. For
these reasons, I am skeptical and recommended that PGTI be sold from the AIM
Small Cap Equity Fund. There may be more potential left in this stock, but we
are happy taking a 37.44% return given the opaque future and current valuation.
Source: FactSet
