Atkore Inc. (ATKR, Financial) is a leading manufacturer of industrial products. It has three segments: Electrical, which produces conduit and cable management solutions for commercial, industrial and residential electrical systems; Cable Solutions, which offers cable management solutions for the communications and energy industries; and Tubing Solutions, which produces metal tubing products for various end-markets, including HVAC, refrigeration and industrial applications.
Formerly Tyco International’s (TYC, Financial) Electrical and Metal Products business, it was renamed Atkore after going private in 2011. Atkore has boosted sales from $1.5 billion to north of $4 billion since re-emerging as a public company in 2016. The company offers a range of products under brand names such as Allied Tube & Conduit, AFC Cable Systems, Kaf-Tech, Heritage Plastics and more, with its growth mainly being driven by an acquisition strategy.
Market risk
The market is on fire to start this year with plenty of stocks up huge, at least on paper. Atkore is up 24%, but I believe that for long-term investors, plenty of upside potential remains. Could we head into a long-term recession, pushing Atkore’s market value down from $5.6 billion to $1 billion? Sure. Will it stop being a leader in the manufacturing of electrical conduits and cables for the construction and electrical industries? Not likely. Will those industries simply cease being a vital part of society? I don’t think so.
To clarify, I believe that even if the market pushes the price down by 80% in the short-term, the company’s underlying value will likely remain very high. Now, that also means it could continue to trade with a relatively valuation. It’s currently trading at a forward price-earnings ratio of just 9 compared to the industry average of 17.
Atkore's financials
Atkore operates with impressive margins, helping it turn $1.64 billion in gross profit into nearly $900 million in net earnings over the last 12 months. Atkore has also managed to keep leverage at a manageable level with $761 million in long-term debt and $307 million in total cash.
More importantly, the company has incredible profitability and is highly effective at turning retained earnings into growth while keeping capital expenditures under 20% of net income. So, on $3.9 billion in sales, 42% comes down as gross profit and then 23% as net profit. What is really important here is that Atkore can do this with less than $2.6 billion in total assets, of which only $900 million is allocated toward Property, Plant and Equipment. This is why return on assets is 32% and return on equity is 86% over the last 12 months.
Strong economic moat
After John Williamson's retirement in 2018, Bill Waltz took over as CEO of the company. Under both of their leaderships, the company engaged in a strategic divestment of business segments suffering from intense competition and pursued an active acquisition plan to create strong competitive advantages. An example of this is the Polyvinyl Chloride (PVC) segment, where the company is now the number one operator in the United States. The segment was built almost entirely through acquisitions, making it an excellent example of a deep-moated business.
Atkore seems to have a strong durable competitive advantage thanks to its leadership position in fragmented markets across multiple business lines. It does this while protecting the environment through industry-leading energy achievements. These efforts have contributed to reductions in Atkore’s greenhouse gas emissions, which now that ESG scores are becoming a selling point bodes well for the company’s future operations and overall corporate perception.
Atkore’s latest quarter
On Feb. 1, Atkore reported first-quarter earnings that beat estimates, with earnings of $4.61 per share and revenue of $883 million. Despite forecasting weaker financial performance in a previous quarter, management raised its guidance for full fiscal 2023. Full-year Ebitda is expected in the $950 - $1,050 million range with full-year diluted earnings share expected to be between $15.85 and $17.75 vs. analysts' consensus estimates of $14.48. Moreover, Atkore is still planning to buy back $500 million worth of shares under the current share repurchase authorization this year. That will further improve earnings per share. By 2025, I think earnings could easily reach $20 per share.
Better still, management continues to look for acquisitions. Waltz said the following about M&A in the last earnings call:
"We deployed $649 million in M&A between FY 2017 and FY 2022... That group of deals traded at a combined result of less than 1x revenue and less than 2x adjusted Ebitda in 2022, representing a tremendous synergy improvement driven by the execution of our Atkore Business System."
He continued to say more of the same during the latest call on Feb. 1:
"We’re actively pursuing things. We’ve actually increased the size of our M&A team here in the last month, just to continue to expand, whether different products in the States look more aggressively into Canada, look more aggressively into Europe. So we are deploying our capital well between M&A, internal investments, and obviously, stock buyback."
Future potential
The company’s strong competitive advantages should be easy to see in my view just from the numbers Atkore has been able to rack up. Management should be given a lot of credit for taking a formerly unprofitable business from Tyco and turning it into a solid investment vehicle.
Any positive surprise in earnings releases and the market could continue to push the share price much higher. Any revaluation toward the sector median price-earnings ratio could also send the shares higher. Combining my estimates of future earnings growth and assuming the stock could eventually reach the sector median price-earnings ratio, Atkore could double before the end of 2025.
