Atkore: ‘This Is Going To Be The Best Decade Ever’
– Atkore reported FY 23 earnings, initially causing a stock sell-off.
– CEO Bill Waltz believes this will be the best decade for the company and the electrical industry.
– Atkore benefits from secular tailwinds such as grid hardening, electrification and reshoring.
– Based on my model, Atkore continues to look cheap, even after making the model more strict.
ATKR) reported earnings today and the stock was initially sold off.Atkore has been a tremendous winner over the last few years, largely due to pricing tailwinds.In this article, I’ll explain why CEO Bill Waltz thinks, “This is going to be the best decade ever.”
Atkore FY 23 results
Atkore reported earnings on Friday with an initially bad reaction from the market, seeing shares down close to 10 percent to recover most of the losses throughout the day.CEO Bill Waltz said the following during the call about the business and the industry, including competitors like Encore Wire (
I think every one of our peers, no matter where you are in the electrical industry, this is going to be the best decade ever with just everything from PG&E (
[PCG]) [….] the grid hardening in general, the BEAD act when it comes.
There’s just so many different things to go.
He referred to
PG&E’s approval to bury 1,200 miles of power lines in California to prevent wildfires.Grid hardening is one of the many secular tailwinds Atkore enjoys, together with several government acts supporting development:
– Renewable Energies (Build America, Buy America Act, Inflation Reduction Act)
– Grid Hardening (Build America, Buy America Act, Infrastructure Investment and Jobs Act)
– Digital Infrastructure (Broadband Equity, Access, and Deployment Act, Build America, Buy America Act, CHIPS and Science Act, Infrastructure Investment and Jobs Act)
– Electrification of Everything (Build America, Buy America Act, Infrastructure Investment and Jobs Act)
– Reshoring (Build America, Buy America Act)
As you can see, these secular trends are all supported by massive government spending and Atkore will be a large beneficiary of it.
Results: Now and as we advance
beat analyst EPS targets by 3%, while revenue was missed by 5%.Over the last three quarters, Atkore has always missed revenue while beating EPS, particularly in the previous quarter, with a 33% beat aided by an accounting change regarding the solar credits.More importantly, let’s look at internal forecasts.
We can see a similar picture here: Net sales were at the low end of the -7 to -15% outlook with -15.5%, while Adjusted EPS was above the $3.7-4.1 range with $4.21, even though the tax rate was higher than expected (21.9% versus 18-20%).
For the full-year results, we can look back to Q4 2022, where they issued the first FY 2023 outlook: Net sales were expected to be flat to -10% and ended at the lower range with -10.1% year over year.Atkore considerably beat its profitability outlook, going from $850-950 million AEBITDA to $1042 million.
Adjusted EPS beat by an even wider margin with $19.4 versus an initial $13.1 to 14.9 outlook.This was driven by twice as many buybacks as guided ($491 versus $250 million, which drove $2.17 in adjusted EPS), slower-than-expected pricing normalization and an accounting change regarding solar credits for a $0.42 EPS benefit.Overall, we can see that Atkore, as usual, underpromised and overdelivered.Let’s look at the initial FY 24 guidance.
We can see that Atkore expects stable net sales with declining profitability.
We already saw this trend of a declining AEBITDA margin throughout the year, going from 32% in Q1 23 to 27% this quarter.Atkore expects FY 2024 to achieve a 25-26% margin and the long-term margin in that range.
Bears would say that pre-pandemic Atkore had an AEBITDA margin in the mid-teens and that margins could deteriorate back to those levels.
We must remember that most of Atkore’s margin improvements came from pricing gains in the PVC relations products, notably Plastic Pipe Conduit & fittings.This segment grew from 18% of sales in FY 17 to 37% in FY 23.Atkore invested throughout its product offering into many other areas to diversify its revenue streams and build scale economics.This should help to hold margins and I also trust management to be conservative with their goal here.Atkore saw 3.2% volume growth in FY 23 and expects this to pick up to low double digits in FY 24, as delayed government funding for broadband and distributor destocking headwinds should roll over.
This strong expected volume growth should help offset continued pricing normalization.
Introducing a quarterly dividend
To my surprise, Atkore announced a quarterly dividend starting in Q1 24.While the exact payment hasn’t been announced yet, it is estimated to be in the $0.3 to 0.35 range, meaning $1.2 to $1.4 per share.This is very well covered by EPS guidance of $16 to $17.This adds a fifth layer to the capital allocation strategy after organic growth investments, stock buybacks, M&A and maintaining leverage under two times normalized AEBITDA.Given the still cheap valuation, I would have preferred it if we used these $50 million or so to repurchase shares, but a quarterly dividend will also bring new investors into the stock.Overall, it is not a big deal for my thesis.
Atkore continues to be cheap
my initial coverage, I have hardened my valuation approach by increasing the hurdle rate from 10% to 15% to account for the risks associated with the business.Previously, I assumed 40% of CapEx as a growth investment.
Atkore shared a slide revealing that growth CapEx in FY 23 was 70% (65% conduits of growth + 5% digital) and guided for continued capacity investments, warehouse investment and servicing capabilities with two new warehousing operations and digital investments.Over time, maintenance CapEx should be measurable by depreciation.
I also looked at operating leases representing around 1/8th of the total debt.This is just for informational purposes and I included the leases in the total debt to stay conservative.We can see that Atkore looks attractively priced, even at this 15% hurdle rate, with minimal required growth over the next decade.
Pricing remains the main risk
The large risks with Atkore are a pricing normalization beyond what management expects and a return to pre-pandemic operating margins of teens instead of mid-twenties.Atkore positioned itself well to maintain higher margins in the future, but we must observe this development.
The future is bright
Atkore continues to perform well and reaffirmed its FY 25 and long-term target.CEO Bill Waltz said that even without M&A, they are very comfortable with the $18 EPS target, given the many organic investment opportunities in the market, like solar torque tubes.Atkore is disciplined in its capital allocation and continues to drive growth initiatives in secular growth markets.
While the stock might be tough for a while, as pricing normalizes, the fundamentals of the business are stellar and eventually, shares will reflect that.Once prices are normalized and Atkore can grow faster than its markets (that’s management’s ambition), we should see a multiple expansion from the current 15% owner earnings yield.I bought more shares after the initial earnings dip and Atkore remains firmly in the top 10 of my portfolio.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of ATKR either through stock ownership, options, or other derivatives.I wrote this article myself, and it expresses my own opinions.
I am not receiving compensation for it (other than from Seeking Alpha).I have no business relationship with any company whose stock is mentioned in this article.
This is not financial advice.
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