The Thesis
As Tecnoglass (NYSE:TGLS) entered into 2024, the weakness in the topline continues due to softening demand for the company's product in the single-family end market. However, activity across the multifamily and commercial end market remains favorable, leading to strong orders and robust backlog levels. I expect this strong backlog along with growth in the company's vinyl business should drive the company's topline growth in 2024 despite headwinds in certain parts of the business. Margin prospects also look promising as the volume grows in the coming quarters, which along with disciplined cost reductions should help the company in margin expansion going ahead. Since my last article, the stock is currently down mid-single digits due to unfavorable earnings results. However, the stock is still priced attractively versus its peers, which makes this stock a decent buy at the current levels considering its promising long-term growth prospects.
TGLS Q1 2024 Performance
While the company saw double-digit topline growth for the full year 2023, it experienced some weakness in the latter half of the year. Entering into 2024, this weakness continues further as the company's topline declines approximately 4.9% to $192.6 million versus the prior-year quarter. This was primarily a result of continued end-market pressure in the single-family residential sales channel, which accounts for about 40% of TGLS sales. Downtime related to the maintenance in January also impacted the revenue growth, however, the company's multifamily and commercial business remained strong during the quarter in line with the expectation as it continues to execute on a robust backlog.
Topline contraction during the quarter also impacted the company's profitability, as the company's adjusted EBITDA margin saw a notable decline to just 26.5% versus 42.4% in the prior-year quarter. Higher SG&A as a percentage of sales, impact from unfavorable revenue mix related to the installation of stand-alone products, and additional expenses associated with temporary promotional activities in the fourth quarter of 2023 also negatively impacted the company's margins during the quarter. Lower EBITDA also impacted the company's bottom-line performance, as the adjusted EPS declined significantly during the quarter to $0.66 from $1.08 a year ago, missing the consensus estimates by $0.01.
Outlook
As the company entered 2024, the topline continued to be under pressure as the activity across the single-family residential end market remained soft throughout the quarter due to the higher interest rate environment. I expect this to continue further as higher interest rates should continue to influence the consumers purchasing decisions at least in the near term, which should give headwinds to the company's sales in the coming quarters.
However, the demand environment in the multifamily and commercial end market looks healthy, which should continue to help the company to give support to the company's overall sales. In addition to this, backlog levels also look strong, reaching to a record level of $916.2 million, reflecting sustained business momentum and a strong pipeline primarily in the commercial end market. The company backlog to sales conversion is also good, with 99% of the backlog rolling off within 18 months, which should further drive the company's revenue growth in the coming quarters.
Apart from these, the company's strategic entry into the manual window market is showing positive results so far, with quoting activity surpassing its expectations. Vinyl orders are also expected to accelerate further in the latter half of the year and should significantly contribute to the company's results going forward. In addition to this, the company has also completed onboarding new distributors in Northern Florida, which, in my opinion, should further strengthen the company's market presence in the future, which, along with promising opportunities in vinyl and a large addressable market for it should help the company in gaining market share further driving the company's sales in 2024 and beyond.
Furthermore, the company's core market in the southern states is benefiting from positive demographic trends like population growth, urbanization, and migration patterns in the region. While the overall housing market has a mixed outlook across the U.S., both multifamily and single-family housing starts are moving upwards in the region due to favorable demographic trends and a pronounced housing shortage in the region. In my opinion, these factors should drive robust activity in the company's primary market in 2024 and beyond, leading to topline growth going forward. Additionally, the migration of new residents and businesses to these southern states should boost demand for both the new construction and remodeling projects in the region's housing sector, further benefiting the company's revenue in the longer term.
Overall, in my opinion, despite a mixed outlook, continued strong activity primarily in the commercial and multifamily and backlog growth driven by this should support the company's topline growth in the coming quarters. Promising activity in the company's vinyl business on the other hand, tailwinds from demographic trends in the company's core market and the company's significant presence in the region should drive growth for TGLS in the longer term.
Valuation
Since my last article on TGLS in April, the company's stock is down approximately 7% and currently trading near $51 after hitting a low of $41 in June last week. This decline was a result of poor earnings declared by the company showing year-on-year sales and margin decline as well as missing EPS estimates. Currently, the company's stock is trading at a forward Non-GAAP P/E ratio of 14.84, based on FY24 EPS estimates of $3.41. While this valuation represents a premium to its five-year average P/E, the stock is still at a notable discount as compared to its sector median of 18.44. TGLS also has better margins as compared to its closest peers including companies like AZZ Inc. (AZZ), Gibraltar Industries (ROCK), and Hayward Holdings (HAYW) as we can see in the table below.
In my opinion, the company's margin should continue to grow further despite the near-term turbulence related to the weak demand environment in the single-family end market due to higher interest rates. I expect strong backlog levels and healthy activity in the multifamily should drive volume growth, which should benefit the margins as well. Long-term margin prospects, on the other hand, remain favorable as well and considering the company's historical margin performance versus its peers, I believe the company's stock to be attractively valued at the moment and should improve further with margin expansion in the longer term
Risk
The company's margin saw a year-on-year decline for two consecutive quarters after increasing notably in recent quarters with the help of strong volume growth and the company's margin expansion initiatives. My thesis is built upon the assumption that the company's topline will perform well in the coming quarters of FY24 due to strong backlog and healthy demand in certain end markets. This, along with disciplined cost savings and focus on higher margin projects, should help the company in margin growth in the coming quarters. However, if the company continues to face headwinds primarily in the single-family end market from higher mortgage rates, which impacted the Q1'24 sales as well, the company's margin might also hurt significantly, resulting in poor stock performance in the near term.
Conclusion
As discussed above, the company's stock is still valued attractively as compared to its peers, trading at a discount of approximately 20%. While headwinds from weak demand in the single-family end market impacted the company's business in the first quarter of 2024, its topline is strongly positioned to grow in 2024 with record backlog levels and anticipated benefits from market share gain from vinyl growth and new product introduction. Margin should also benefit from higher volume and focus toward higher margin category in the longer term. Considering these factors, I still believe that the stock is at a decent valuation at current levels, making me stay with the "BUY" rating.