Patrick Industries Inc. (PATK, Financial) looks appealing as a value investment. The company manufactures and distributes building products and materials, primarily for the recreational vehicle and manufactured housing end markets. It has a market capitalization of just over $2 billion and has generated sales of $3.3 billion over the past 12 months.
Booming market
Homebuilding and construction are two particularly cyclical industries. Right now, the sector is experiencing a cyclical upswing, which Patrick is taking advantage of. Wall Street analysts are estimating a net profit for the group of $200 million for the current financial year, up from just under $100 million for 2020.
It seems as if there is far more to this company than just a cyclical growth play. Over the past six years, revenue has grown at a compound annual rate of 22% and net income has expanded at a compound annual rate of 18%. Book value per share has grown at a compound annual rate of 33%, while the number of shares has remained constant at 23 million.
The one weak spot on the balance sheet that immediately stands out is the company's debt. At the end of its most recently reported quarter, net debt was just over $1 billion, giving it a net debt-to-equity value of 1.7 times.
This is not catastrophic, but it is on the edge of concerning for a cyclical business. Reading through the company's financial reports, it looks as if it still has plenty of liquidity, with cash and available facilities of $468 million reported at the end of the second quarter.
Patrick is riding a cyclical upswing in the construction and housing markets, and management appears to be using the windfall from this upswing to crystallize growth potential.
Business acquisitions in the second quarter of 2021 totaled $239 million. Acquisitions during the period included Hyperform Inc., which operates under the SeaDek brand name in the marine original equipment manufacturer market.
The company was also repurchasing shares in the second quarter. It returned $28 million to shareholders, including $22 million through the opportunistic repurchase of 260,000 shares and $6.6 million of dividends.
Capital allocation decisions
I admit that I have only completed a limited analysis on this company so far, but these look to be astute capital allocation decisions. Management is adding to growth through bolt-on acquisitions, where it sees opportunities, and, at the same time, is returning cash to investors by repurchasing stock and issuing dividends.
The acquisitive nature of the enterprise explains why its revenue and profits have grown so rapidly over the past six years. The combination of acquisitions and organic growth has helped push sales higher while generating additional cash flow to reinvest in the enterprise.
These types of companies can be great investments as long as they keep the flywheel going. If the stream of acquisitions stops or slows, growth can come grinding to a halt. However, it can produce an opportunity for the company to reduce debt, which Patrick may have to consider in the future.
Still, if the company can maintain its current growth rate, then the stock looks appealing from a valuation perspective. It is selling at a forward price-earnings ratio of just under 10. Considering its growth rate over the past six years, with earnings doubling roughly once every three years, that seems incredibly cheap. In addition, the stock offers a 1.3% dividend yield.
One reason why the market could be avoiding the company is the flywheel nature of the business. If acquisitions stop, growth will disappear, and it won't deserve a high valuation. That is something to keep in mind.
