Shares of Atkore (NYSE:ATKR) have fallen out of favor in recent months, just like many other industrial related peers. The company is a long-term growth play on the electrification of the economy. Atkore has seen incredible momentum in recent years, in sales but certainly in terms of margins. While these peak earnings have come down a great deal already, earnings power remains impressive in relation to the valuation.
While I am more cautious than management, which believes that earnings can be kept up at current levels, I am still appealed to the overall valuation and balanced capital allocation model, meaning that I am initiating a modest position here.
About Atkore
Atkore is a global manufacturer of electrical, safety and infrastructural solutions, used to power and protect the world. This includes electrical conduit & fittings, cable & cable management systems, infrastructure products, and safety and security products.
Actual products to think of include cable trays, electrical prefabrication, fittings, conduits, trunking, sign support systems, armored cables, security bollards, among many others.
With the world rapidly moving towards electrification, the company is well positioned. Some three quarters of sales are generated from the sale of electrical and related products, in fact, over 90% if we include the support function. This is complemented by a smaller safety & infrastructure segment.
What Happened?
A decade ago, the business generated about $1.7 billion in sales, with sales coming in largely flattish all the way until the start of the pandemic. That is a bit too simplistic as well, as low single digit operating margins rose to the low double-digit margins over this same period of time, with impressive margin work being done during this period of time.
Post pandemic, sales rose sharply to $3.9 billion in 2022, with operating margins exploding to 30% of sales. What followed was a period of stagnation, with sales and margins coming down (partially) as prices reversed.
On top of this huge sales growth and margin expansion, the company bought back some 40% of its shares over the past decade.
All this created a huge boom in the share price, as a $30 stock in 2019 broke the $100 mark in 2022 and actually kept on rising ever since. Shares peaked at $195 per share in March, but are now back to $136 per share.
Picking Up The Valuation
In November of last year, the company posted fiscal 2023 results. Revenues were down 10% to $3.52 billion from the record 2022 results, as the composition of growth shows actually higher volumes and lower prices after an inflationary period in the year before.
Operating profits were down 28% to $893 million, with GAAP net earnings of $690 million working down to earnings of $17 and change per share. This was down from a $20 and change number in the year before, as declines on a per-share basis were more limited thanks to share buybacks.
Net debt of $374 million was very manageable, with EBITDA topping the billion mark, as quite frankly, shares were trading at non-demanding multiples after the business performance was still solid. After all, despite the fall in the results, operating margins were still posted equal to 25% of sales.
Needless to say, trends were worsening through the year as fourth quarter sales of $870 million were down 15% on the year before, as operating margins fell towards 21% of sales.
Despite these trends, the company guided for pretty flattish 2024 results, seeing sales between $3.50 and $3.65 billion, with EBITDA seen between $900 and $950 million, resulting in potential earnings between $16 and $17 per share, as the company remains on track to post earnings close to $18 per share in 2025. Note that improvements were seen throughout 2024, with first quarter EBITDA seen at just $200-$210 million.
Attempting to Stabilize
In February, the company posted a 4% fall in first quarter sales to $799 million, while EBITDA was down to $213 million. The continued normalization in the results actually looks worse than it is, as the company started the year with double-digit volume growth, offset by continued declines in pricing. Nonetheless, while such a dynamic is painful for margins, operating profit margins were reported near 22% of sales.
Following the quarter, the company maintained the guidance, except that it hiked the full-year earnings guidance by half a dollar to $16.50-$17.50 per share.
Some weakness was observed in the second quarter results, as released in May. Revenues of $793 million were down over 11% on the year before, with adjusted EBITDA of $212 million being largely at par compared to the first quarter. Similar pricing pressure was seen, however volumes were down a percent, after still growing at double-digit rates in the first quarter. Nonetheless, operating margins of 22% remained very sound as earnings per share were reported at $7.28 per share.
Net debt was pretty flat at roughly $400 million, while a $425 million EBITDA number was reported in the first half of the year. The company actually cut the full-year EBITDA outlook by fifty million to $850-$900 million, with earnings now seen back at the original guidance of $16-$17 per share.
What Now?
Trading at $136, the company trades at just around 8 times earnings here, as the normalization in the results is now going on for two years already, while the balance sheet is largely unleveraged. The company is firmly on track to post revenues at a $3.0-$3.5 billion revenue run rate.
The big issue is that peak operating margins of 30% plus have come down to the lower-twenties. If we conservatively assume that margins might fall back all the way to 10%, and associated pricing pressure make that sales fall to $3 billion, operating profits of $300 million yield much lower earnings. In such a case, I peg net earnings around $200 million, resulting in earnings of roughly $5.50 per share.
If that is reality, earnings might fall much more, as this would stand in sharp contrast to the $18 earnings per share target for 2025, and in fact, such a scenario would push up earnings multiples to the mid-twenties. This, however, shows that there is some support to be found as well, as such earnings pressure will not take place overnight, of course.
The truth is that I like the capital allocation of management here, focusing heavily on well-paced share buybacks. Atkore is a gradual and continued buyer of its own stock, while its leverage ratios remain quite modest. On the other hand, are the current softer conditions, which are flagged by peers as well as a macro issue, as the question is of course how much further sales and moreover margins will go down, as the company sees weakness in HDPE and solar.
Nonetheless, if the company can only maintain a substantial portion of current profitability, the outlook for the shares arguably is good enough. Based on current earnings power, an 8 times multiple is appealing, and the company continues to believe in such earnings numbers for the coming years. However, even if earnings are cut in half here, multiples are easily justifiable, which together with a sound positioning and modest leverage makes me simply appealed to the risk/reward here.