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Patrick Industries: Recent Weakness Does Not Negate Upside

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One of nan really awesome things astir being a worth investor is that galore of nan prospects you mightiness take from already person astir aliases each of their early symptom priced in. This tin mean that, even erstwhile fundamentals deteriorate, upside for investors tin beryllium alternatively significant. One really awesome illustration I could constituent to that has precocious turned nan area successful a antagonistic measurement is Patrick Industries (NASDAQ:PATK). Based connected nan information presently available, nan institution has travel nether unit from some a income and profit perspective. Cash flows are also, for nan astir part, showing signs of weakness. Even pinch this and moreover successful spite of a important move higher, shares of nan institution are trading astatine very debased prices, some connected an absolute ground and comparative to akin firms. While I americium not arsenic bullish connected the institution arsenic I was previously, I do still deliberation it offers immoderate upside for investors from here. As such, I person decided to clasp nan 'buy' standing I had connected nan banal previously.

The image is changing

Over a twelvemonth ago, successful January of 2022, I wrote an article discussing nan finance worthiness of Patrick Industries. In that article, I talked astir really nan institution had consistently grown its apical statement while mostly posting affirmative rate travel data, complete nan anterior fewer years. I besides recovered shares of nan institution to beryllium rather cheap. All of these factors mixed made maine comfortable successful standing nan business a 'buy'. This benignant of standing coming from maine is an denotation of my belief that shares should outperform nan broader marketplace moving forward. And that's precisely what nan institution achieved. While nan S&P 500 has dropped 7.5%, shares of Patrick Industries person seen upside of 13.7%.

Financials

Author - SEC EDGAR Data

This move higher was based connected 2 superior things. The first of these was nan truth that shares of nan business looked rather cheap. We will get to that much adjacent nan extremity of this article. The 2nd is nan truth that, for nan astir part, nan firm's basal information continued to improve. If you look astatine information for 2022 versus 2021, for instance, you will spot immoderate alternatively bullish results. Revenue successful 2022 totaled $4.88 billion. That's 19.7% higher than nan $4.08 cardinal nan institution reported for its 2021 fiscal year. Management attributed this summation to beardown request for RVs successful nan first half of nan 2022 fiscal year. They besides said that much accordant marine and lodging request passim nan twelvemonth helped, arsenic did immoderate acquisitions completed successful some of nan astir caller fiscal years.

The income summation brought pinch it drastically improved profits. Net income, for instance, changeable up from $224.9 cardinal to $328.2 million. Operating rate travel besides roseate nicely, climbing from $252.1 cardinal to $411.7 million. On an adjusted basis, nan maturation was a spot slower, pinch nan metric climbing from $362.2 cardinal to $472.4 million. And finally, EBITDA for nan institution spiked from $480 cardinal to $643.1 million.

Financials

Author - SEC EDGAR Data

If we look astatine nan information presented for nan fiscal years successful their entirety, you mightiness deliberation that nan company's maturation spurt continues to this day. But that wouldn't beryllium nan case. In nan last 4th of 2022, for instance, guidance reported gross of $951.9 million. That's down 17% compared to nan $1.15 cardinal reported 1 twelvemonth earlier. This plunge was driven mostly by a 47% alteration successful nan number of wholesale RV manufacture portion shipments that impacted RV gross negatively to nan tune of 39%. Marine gross helped to offset this to immoderate degree, climbing by 35% acknowledgment to an 11% emergence successful wholesale powerboat manufacture portion shipments. Unfortunately, this was nan only agleam spot for nan institution successful nan last quarter. Motor location gross roseate only 3%, pinch a 12% plunge successful portion shipments impairing potential. And business gross managed to driblet by 2% acknowledgment to a 16% autumn successful lodging starts.

This driblet successful income brought pinch it a driblet successful profits arsenic well. Net income declined from $61 cardinal to $40.2 million. Whenever you spot income successful a low-margin abstraction contract, nan driblet successful profits and rate flows will beryllium moreover worse astir of nan time. This is because low-margin industries are often capital-intensive and you extremity up pinch little gross to dispersed crossed nan firm's fixed costs. It is existent that operating rate travel roseate twelvemonth complete year, climbing from $104.7 cardinal to $181.9 million. But if you set for changes successful moving capital, you would spot that nan metric really fell from $91 cardinal to $71.8 million. Over that aforesaid model of time, moreover EBITDA took a hit, dropping from $128.8 cardinal to $108.4 million. One affirmative for investors to see is that, moreover though immoderate basal information has been disappointing, guidance did decide successful December of past twelvemonth to summation their stock repurchase programme to $100 cardinal from nan $38.2 cardinal that they had anterior to nan increase. This shows astatine slightest immoderate ballot of assurance for investors to enjoy.

Trading Multiples

Author - SEC EDGAR Data

Based connected nan information from 2022, shares of Patrick Industries are trading astatine a price-to-earnings aggregate of 5.2. The value to adjusted operating rate travel aggregate comes successful astatine 3.6, while nan EV to EBITDA aggregate should beryllium 4.6. If we usage information from nan 2021 fiscal twelvemonth instead, these multiples would beryllium 7.6, 4.7, and 6.2, respectively. Now, fixed that conditions are worsening because of a plunge successful request for RVs, it stands to logic that nan firm's basal information will apt proceed to worsen from here. If we presume that financial capacity reverts backmost to what nan institution knowledgeable successful 2019, anterior to nan COVID-19 pandemic, we would still get multiples that are reasonable. The price-to-earnings aggregate would travel successful astatine 18.9. The value to adjusted operating rate travel aggregate would travel retired to 9.5. And finally, nan EV to EBITDA aggregate would beryllium 12.3. As portion of my analysis, I compared nan institution pinch 5 akin firms. On a price-to-earnings basis, these companies scope from a debased of 7.5 to a precocious of 909. Using nan EV to EBITDA approach, nan scope was from 4.8 to 38.1. In some of these scenarios, Patrick Industries was nan cheapest of nan group. And finally, utilizing nan value to operating rate travel approach, nan scope would beryllium from 2.6 to 282.4. In this case, only 1 of nan 5 companies was cheaper than our prospect.

Company Price / Earnings Price / Operating Cash Flow EV / EBITDA
Patrick Industries 5.2 3.6 4.6
LCI Industries (LCII) 7.5 4.9 6.0
Modine Manufacturing (MOD) 17.9 17.7 9.1
American Axle & Manufacturing Holdings (AXL) 909.0 2.6 4.8
Gentherm (THRM) 50.1 62.4 22.4
XPEL Inc. (XPEL) 56.5 282.4 38.1

Takeaway

Given what's happening successful nan recreational conveyance market, I fishy that immoderate further symptom lies up for Patrick Industries. Having said that, nan institution continues to station affirmative results, moreover if they aren't improving. In nan adjacent mates of quarters, I fishy nan image will show continued signs of worsening. But moreover a return to pre-pandemic levels of profitability would consequence successful shares looking attractively undervalued. To beryllium clear, I do deliberation nan easy money has been made successful this case. But absent thing coming retired of near field, I judge that Patrick Industries still warrants a bargain standing astatine this time.

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Editor: Naga



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