Recently, GuruFocus introduced a new metric, the GS Score, that can be found at the top of each Summary page. Scores range from zero to 100, with higher scores for better companies.
There are currently six companies with perfect scores of 100, with high marks for five key criteria: profitability, GF Value, momentum, financial strength and growth.
Three of the six are over-the-counter pink sheet stocks and the other three trade on the major American exchanges.
One of the three is Simpson Manufacturing Company Inc. (SSD, Financial), a company that manufactures wood construction products.
About Simpson
The company describes itself this way on its website:
“Simpson Manufacturing Co. Inc., headquartered in Pleasanton, California, through its subsidiary, Simpson Strong-Tie Company Inc., designs, engineers and is a leading manufacturer of wood construction products, including connectors, truss plates, fastening systems, fasteners and shear walls, and concrete construction products, including adhesives, specialty chemicals, mechanical anchors, powder actuated tools and reinforcing fiber materials.”
In this slide from its March 2022 investor presentation, the company shows how its acquisitions have insulated it from the housing industry cycles:
In its 10-K for 2021, the company reported it offers more than 14,000 wood construction products and over 1,000 concrete construction products for residential construction, light industrial and commercial construction, repairs and remodeling. It sells through contractor distributors, home centers and co-ops lumber dealers and original equipment manufacturers. In 2021, it welcomed back 1,700 Lowe’s (LOW, Financial) stores.
Competition
The company noted in its annual filing:
“We encounter a variety of competitors that vary by product line, end market and geographic area. The Company's competitors include many regional or specialized companies, as well as large U.S. and non-U.S. companies or divisions of large companies. While we do not believe that any single company competes with us across all of our product lines and distribution channels, certain companies compete in one or more product categories and/or distribution channels.”
Simpson believes it has competitive advantages because of the value-added services it provides to and for its customers. These are services such as designing end-to-end construction product systems, strong customer support and strong relationships with engineers that help get its products specified on blueprints.
It also has U.S. and foreign patents covering products it manufactures and markets.
Performance
According to information in the annual SEC filing, Simpson has handily outperformed both a peer group (as measured by the Dow Jones Building Materials & Fixtures (DJUSBD) exchange-traded fund) and the S&P 500 index.
From GuruFocus, the annualized returns:
- Year to date: -23.05%
- One year: 0.19%
- Three years: 18.8%
- Five years: 21.25%
- 10 years: 13.01%
Total annual returns:
- 2017: 31.32%
- 2018: -5.71%
- 2019: 48.22%
- 2020: 16.48%
- 2021: 48.82%
- 2022: -23.05%
Financial strength
Simpson receives a very high mark of 9, but not a full 10 because it has taken on some debt in recent years.
Nevertheless, it has a high interest coverage ratio and is a leader among construction industry company balance sheets.
The high Piotroski F-Score indicates management is doing a good job and the high Altman Z-Score tells us the company is very financially stable.
The WACC versus ROIC tells us the company is using investors’ money effectively: its weighted average cost of capital is 8.43%, while its return on invested capital is 31.33%.
These results also contributed to average free cash flow growth of over 21% per year for the past 10 years.
Profitability
A full-marks score here because Simpson has not only industry-leading margins and returns, but because its revenue, Ebitda and earnings per share are also industry champions.
In a further sign of management strength, its three-year earnings per share growth is nearly double its three-year revenue growth. Here’s how these three metrics have grown over the past decade:
Dividends and share buybacks
If you’re looking for a stock with a dividend that stays ahead of inflation, Simpson may be worth consideration. It has grown by an average of 8.31% per year over the past decade.
While the dividend has grown by more than 8% per year, the share price has grown even faster: an average of 15.56% per year over the past decade. That, of course, has stunted the dividend yield, which is currently 0.94%.
With a dividend payout ratio of 16%, there is ample room for it to grow.
The company is also enhancing shareholder returns with share repurchases, by an average of 1.24% per year.
Valuation
On April 14, Simpson had a price-earnings ratio of 17.46, just above its 10-year low of 16.74.
Divide that by a five-year Ebitda growth rate of 21.60% per year, and you arrive at a PEG ratio of 0.80, which is below the fair value marker of 1.
This undervaluation can be attributed to the recent pullback in its share price:
Because Simpson has a high predictability score (4 out of 5 stars), we can assess valuation with the discounted cash flow calculator.
All metrics reach the same conclusion: Simpson is modestly undervalued.
Gurus
Despite the quality and valuation metrics, the gurus have been net sellers of Simpson for most of the past two years.
What’s more, four of the five gurus who currently own its stock reduced their holdings in the last quarter of 2021. That includes the three largest guru stakes:
- John Rogers (Trades, Portfolio) of Ariel Investment owned 677,240 shares at the end of 2021, a reduction of 5.01% from the previous quarter. They represented a 1.56% stake in the company and 0.79% of the fund’s holdings.
- Chuck Royce (Trades, Portfolio)'s Royce Investment Partners held 327,084 shares after a reduction of 3.86%.
- Ken Fisher (Trades, Portfolio) of Fisher Asset Management owned 139,917 shares, after cutting his holding by 0.74%.
Conclusion
There’s no doubt Simpson Manufacturing is a quality company. Each of the individual components that contributed to the 100 out of 100 GF Score is very strong. It is well-managed with the kind of profitability that provides cash for both organic and acquired growth.
Normally, investors would expect to pay a premium to buy this kind of quality and growth. However, the share price has pulled back, creating an opportunity for some investors.
Value investors might want to take a closer look, given the low level of debt and its current undervalued pricing. Growth investors may wish to do the same because of the company’s history and free cash flow. Income investors, on the other hand, likely will find the price of the dividends too high.
