Patrick Industries: Value Play Worth Considering

This solid manufacturer has a lot going for it

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Apr 19, 2018
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Successful investment isn’t all about chasing the hottest new thing in tech. Sometimes, it pays to look at star performers in good old-fashioned industries with solid economic fundamentals.

A prime example of such a company is Patrick Industries (PATK), a major manufacturer of component products and distributor of building products for the recreational vehicle (RV), manufactured housing (MH), marine and other industrial markets. With 82 manufacturing plants and 22 distribution facilities located across the U.S. and in China, Patrick is well-positioned to deliver solid returns.

Financial assessment

Currently, the stock is trading around $57, up almost 37% year-on-year, but down 21% from its yearly peak of $72.35. In our view, the recent pullback represents an excellent entry point. Why? Revenues have grown steadily -- $474.6 million in 2017 compared to $329.9 million in 2016, a 46% increase. Given the growth in the RV market, it would not be out of the ordinary for revenues to increase by at least another 30% in 2018, pushing revenue up to $617 million in 2018.

It is true that costs also increased between 2016 and 2017, but this has been driven by an aggressive mergers and acquisitions push, with management investing $528 million for this purpose between 2015 and 2017. Management expects all acquisitions to become net positive for earnings in 2018. Finally, the company has consistently outperformed earnings expectations, with an average earnings surprise of 19.5% over the last four quarters. While past performance is not an iron-clad guarantee of future success, it is certainly a welcome trend.

Growth prospects

There are three factors that will continue to drive revenue growth for Patrick Industries and will make it an attractive buy for investors:

  1. Increased consumer spending. The RV market constituted 69% of all sales in 2017. The recent tax cuts, coupled with the broader economic expansion have left consumers with more disposable income at their disposal. This has led to more spending in the economy generally, and in the RV market specifically.
  2. Growth in the RV market. The RV market has been undergoing an expansion independent of wider economic growth - the Recreation Vehicle Industry Association (RVIA) reports that the RV market has expanded for the eighth year in a row, with 504,599 units shipped in 2017, up 17.2% year-on-year.
  3. Demographic changes. A demographic shift is driving demand for RVs, with more and more baby boomers retiring and spending their savings. This is a trend that will only expand in the coming decade. Additionally, there is a greater trend of millennial consumers becoming increasingly health-conscious, which has underpinned demand in the outdoor lifestyle industry.

Threat assessment

Although the outlook for Patrick looks broadly good, there are three potential threats that could cause the company problems down the line:

  1. Economic growth must hold up. Revenue growth is to a certain extent contingent on the economy continuing to expand. Although this is true of most companies, in times of recession the leisure sector tends to be more adversely affected than other sectors, as consumers are naturally more likely to cut back on their holiday spending than they are on essentials like gas, food and rent.
  2. Industry control. The RV market is controlled by a near-duopoly, with Thor Industries and Forest River accounting for 85% of the market for towable RVs and 65% of the market for motorised units, making Patrick somewhat dependent upon the success of those two companies.
  3. Trade war. The price of components produced by Patrick, such as fabricated aluminium products, electric systems components, fuel tanks and others will be affected if the U.S.-China trade war escalates. Moreover, the functioning of Patrick’s facility in China could be undermined, further denting the company’s bottom line.

Verdict

We believe that the M&A drive will yield positive results within the next few quarters and see revenues expanding by at least 30% in 2018. Whilst there are threats facing the company, these are industry-specific, and do not stem from any inherent financial weakness in Patrick. Overall, we see the company well-poised to continue its impressive run.

Disclosure: I/We own no stocks discussed in this article.

This article was co-authored by Stepan Lavrouk. Lavrouk is an investment analyst with Almington Capital.