The reroofing of commercial and industrial buildings may fly under the radar of many investors, but it is the daily bread and butter of Carlisle Companies Inc. (CSL, Financial).
It is a line of business that has generated above-average returns over the past decade, and especially over the past two years. So, I believe investors should know about it.
About Carlisle
In its 10-K for 2022, the company described itslf as “a leading manufacturer and supplier of innovative building envelope products and solutions that enable greater energy efficiency in buildings.”
It added that its products are designed to be labor-reducing and environmentally responsible. Further, it provides products to the aerospace, medical technologies and general industrial markets.
A couple of other points deserve attention: the Carlisle Operating System uses lean enterprise and six sigma principles for greater efficiency and operating leverage. Companies with good process improvement strategies can continually reduce their operating costs.
Second, it reported its products are highly engineered, and when that is the case, a company has greater pricing power. Highly engineered means unique and custom solutions that cannot be easily duplicated by competitors.
Third, it is a leader in environmentally-friendly building products, giving it an edge among builders who want to reduce their emissions and lower their costs.
As this chart of comparative performance from the annual filing makes clear, these competitive advantages have helped Carlisle deliver above-average returns:
The chart shows a comparison of cumulative returns for an investment of $100 in each of Carlisle, the S&P 500 and the S&P MidCap 400.
Based in Scottsdale, Arizona, Carlisle has a market cap of $13.07 billion and had 2022 sales of $6.59 billion.
Competition
The company reported that competition varies by segment. For its biggest segment, CCM, or Carlisle Construction Materials, it noted competition also varies by product and region. It added that it is one of four major manufacturers of single-ply roofing systems.
Overall, GuruFocus compares it with Builders FirstSource Inc. (BLDR, Financial) and Masco Corp. (MAS, Financial). In this comparison, Builders FirstSource dominates.
Financial strength
Carlisle carries a significant amount of debt, which adds up to much more than the amount of cash available.
Still, it has an interest coverage ratio of 14.85 and an Altman Z-Score of 4.60, which is well into the safe zone and implies it is in good standing.
It is also one of the rare companies that has a perfect Piotroski F-Score, a full 9 out of 9. This may be one of the results of its process improvement initiatives.
List it, too, as a value creator. Its weighted average cost of capital is 7.16%, while its return on invested capital is more than double that at 15.59%.
Profitability
The GuruFocus system, based on the operating margin, the trend of the operating margin, the Piotroski F-Score, consistency of profitability and predictability rank, provides a 9 out of 10 ranking for profitability.
Note all the dark green bars in the Vs. Industry column, signifying industry-leading results. Specifically, the operating margin is better than 90.80% of companies in the construction industry. It has similar results for return on equity, return on assets, return on capital and years of profitability.
The Piotroski F-Score, as we saw above, is as high as it can go, while its predictability ranking of three out of five stars is just average.
Except for the big jump in 2022, earnings per share without non-recurring items has grown relatively consistently.
Growth
Carlisle gets a full 10 out 10 ranking for its growth rate, based on three- and five-year revenue growth rates, five-year Ebitda growth rate and the predictability of the five-year revenue growth rate.
Over the past three years, the company has posted an average revenue growth rate of 17.20% per year, an Ebitda growth rate of 25.60% and an earnings per share without NRI growth rate of 30.40%. When Ebitda and especially EPS without NRI grow faster than revenue, then the company is becoming more efficient and more effective in its operations.
To lessen the "windfall" of 2022, I am going to look at earnings per share without NRI over the past 10 years. That growth rate averages 13.10% per year. Using the Rule of 72, I will divide 72 by 13.10% to arrive at an answer of 5.50. That means Carlisle can double its profits every five and a half years. Potentially, that means the share price might be expected to double every five and a half years as well.
As for the three- and five-year revenue growth rates, they are modestly consistent.
The company’s free cash flow growth is reassuring, to some extent. Over the past three years, it has averaged 13.40% per year, over the past five years 22.90% and over the past decade 9.80% per year.
Dividends and share repurchases
Some of that cash flow goes into dividends and share buybacks. Carlisle pays a small dividend, currently yielding 1.07%. The dividend payout ratio is also low at just 15%. However, its three-year dividend growth rate is high at 12.7% per year. That is more than enough to cover even the current rate of inflation.
Shareholders also have benefited from a steady stream of share repurchases over the past decade. They have been coming down at an average of 3.52% per year over the last 10 years.
This graphic from the investor section of the company’s website shows how Carlisle has allocated its capital since 2018.
Valuation
As this 10-year price chart shows, the Carlisle share price began to tumble in mid-August 2022, and has since struggled to recover.
Somewhat ironically, the slump began just a couple of weeks after the company announced its third-quarter results. Those results included record second-quarter revenue and earnings, and that it was able to offset continuing inflation with pricing actions. What’s more, it reported that it was benefiting from its pivot to a more focused building products platform.
The GF Value Line sees the decline and declares Carlisle to be modestly undervalued based on historical ratios, past financial performance and analysts' future earnings projections. The chart estimates fair value at $299.07, which is higher than the March 10 closing price of $255.62. That implies a 17% margin of safety.
The price-earnings ratio is 14.57, which is about average for the industry, and its PEG ratio is 0.78, or modestly undervalued.
The discounted cash flow calculator, earnings-based, also assesses the price as undervalued (Carlisle has a three-star predictability rating, so this metric should be taken with a grain of salt).
All things considered, the stock is likely modestly undervalued.
Gurus
Al Gore (Trades, Portfolio)'s Generation Investment Management, with 1,075,670 shares, had the largest holding among the gurus at the end of 2022. Eight other gurus also had positions, including Steven Cohen (Trades, Portfolio) of Point72 Asset Management and Jim Simons (Trades, Portfolio)' Renaissance Technologies.
Around 71.96% of the shares outstanding belong to institutional investors, while 3.19% belong to insiders. CEO and President Christian Koch owned 69,257 shares as of Feb. 4.
Conclusion
Carlisle is a solid company with good metrics, captured by the GF Score of 93 out of 100.
It has tools to manage its operational costs and income, as well as a strong business model. I do not think anyone would buy it for its dividend, but it could be a suitable candidate for investors seeking capital gains.
