Atkore Inc. (NYSE:ATKR) is a dominant producer of steel conduits, PVC, armored cable, and associated merchandise throughout the U.S. and Europe. The corporate operates primarily in oligopoly markets with at most 2 massive opponents in a given section and is itself #1 or #2 in most of them. This little question partly explains their persistently excessive margins.

Atkore was a poorly managed division of Tyco till late 2010, when it was acquired by CBR, and later grew to become public in 2016. After the spin, the corporate was initially led by John Williamson, a 17 yr Danaher (DHR) veteran. Williamson retired in 2018 and was changed as CEO by his COO, Invoice Waltz. Beneath Williamson and Waltz, the corporate divested enterprise segments that suffered from an excessive amount of competitors and, by means of a disciplined acquisition technique, rolled up different segments to create deep moats. An ideal instance of that is their PVC section, the place they’re presently #1 within the U.S. out of two massive operators. The PVC section was created virtually totally inorganically, and is a superb, deep moated enterprise.

Administration is great, rising EBITDA per share at a 27% CAGR from 2015 by means of 2019 although natural development, stellar M&A, and share buybacks, all whereas decreasing leverage. The corporate is presently experiencing windfall earnings, with earnings up 6x from 2019 ranges, which is complicated some traders into pondering that each one development is because of the windfall. That is useless unsuitable. Atkore made this clear by guiding $18 EPS in 2025, a 31% CAGR from 2019. And administration could be very conservative with steerage. They all the time beat. At all times.

$18 2025 EPS steerage

Whereas I’ve argued that ATKR is a top quality, deep moated development firm for a while, this truth has been obscured by the windfall revenue situations in 2022. In consequence, ATKR traded as little as $71 as just lately as September 27, 2022, regardless of being on observe for what turned out to be greater than $21 EPS. With a powerful observe report of development and little or no leverage – they ended the yr with debt/EBITDA at 0.28x – this worth solely made sense if earnings would decline dramatically from 2022 ranges as soon as windfall situations recede.

And recede they are going to. ATKR will certainly lose a few of the margin beneficial properties they’ve achieved through the windfall situations. Then again, ATKR is experiencing sturdy underlying development, utterly other than any windfall. With a secular development tailwind, and the easing of windfall situations, the query on traders’ minds was: what would earnings appear like as soon as the windfall ended?

The corporate addressed this challenge head on in its FY This fall 2022 earnings launch on slide 12, calling out normalized, non-windfall EBITDA of $757M for 2022, greater than double the quantity for 2019. Additionally they guided to $18 EPS for 2025. Administration has a historical past of providing decidedly conservative steerage, which they then all the time beat, so that is all in all probability finest considered a lowball estimate.

A digression on windfall earnings, and WIRE

For example the place the story actually could also be all about windfall earnings, let’s digress briefly and have a look at WIRE. In a current investor presentation – they’ve modified it since then, so I am unable to hyperlink it, sadly – they’d a slide declaring that, from 2011 to 2021, EBITDA had grown at a 23.1% CAGR. Highlighted and all the pieces. Time to take a victory lap?

Not so quick! EBITDA from 2011 to 2019 was really flat, very totally different from ATKR’s virtually 27% EBITDA/share CAGR earlier than the windfall. WIRE EBITDA trended as an alternative at about $100M EBITDA, give or take, after which $118M, after which $723M in 2021. And sure, utilizing $723M, I suppose it’s a 23.1% CAGR. However that is tremendous deceptive. The market cap at WIRE is $2.9B and no debt. I actually do not know what normalized EBITDA at WIRE shall be as soon as the windfall situations return to regular, however there’s a very actual hazard that WIRE is buying and selling at 25x normalized EBITDA proper now.

And that’s simply so totally different from ATKR. ATKR has been rising the entire time, for causes that I’ll get into. And ATKR’s 44% CAGR since 2015 (they had been non-public earlier than that) is much more than 23.1%, if we need to examine apples to apples, utilizing windfall yr 2022 for each firms.

However the level is, the market is complicated ATKR benefitting from the windfall – which they’re – with WIRE benefitting from the windfall. Within the latter case that could be the entire story. However for ATKR it is only a bump – a pleasant bump, to make sure – on a secular development trajectory that was in place earlier than the windfall, and which continues to be in place at the moment. The market is lacking this.

A serious accretive acquisition could also be coming

ATKR has a stellar M&A observe report. The corporate’s deep moats had been created by executing a roll as much as assist create oligopoly markets, and by exiting markets the place competitors would by no means permit for top returns. How good have the acquisitions been? This is CEO Invoice Waltz commenting about this on the FY This fall 2022 earnings name:

We deployed $649 million in M&A between FY 2017 and FY 2022… That group of offers traded at a mixed results of lower than 1x income and fewer than 2x adjusted EBITDA in 2022, representing an incredible synergy enchancment pushed by the execution of our Atkore Enterprise System.

They purchased at what turned out to be 2x EBITDA, after synergies. By rolling up much less environment friendly amenities, turning the crank on the Atkore Enterprise System – that is just like the Danaher Enterprise System, it is virtually a carbon copy of it – and profiting from scale and different synergies, and of the ensuing oligopoly, they’re buying at 2x EBITDA.

ATKR’s stability sheet could be very robust, with $372M of web debt in opposition to $900M of EBITDA at 2023 non-windfall midpoint steerage. ATKR targets a debt to EBITDA ratio of 2x or beneath, leaving them with $1.4B of stability sheet obtainable for M&A. $1.4B, plus greater than $500M of FCF being generated annually, that may very well be put towards M&A in the event that they need to.

And there’s a tantalizing change, launched for the primary time, on the FY This fall 2022 earnings presentation, slide 28, titled “Up to date Capital Deployment Framework”. Earlier variations of this slide have referenced the 2x leverage goal, however the newest deck says:

Preserve Gross Debt to normalized Adj. EBITDA ratio at ~2x or beneath; prepared to go above for choose strategic alternatives

Emphasis mine. This phrase, referencing a willingness to exceed the 2x leverage restrict for choose strategic alternatives, is model new.

So… ATKR is producing in extra of $500M of FCF a yr, and has greater than $1.4B of stability sheet obtainable to them earlier than they method the 2x leverage goal. However they need us to know that they could break by means of that focus on for the best deal.

That is a reasonably large acquisition that they’re contemplating! How massive? Nicely, in the event that they had been to make an acquisition at, say, 6x EBITDA, they must purchase $350M of EBITDA with a purpose to attain 2x leverage, even earlier than contemplating any FCF they generate earlier than the deal closes.

However they’re contemplating exceeding 2x leverage, they usually will be producing FCF. An acquisition that closes in late 2023 – giving them time to generate extra cash – may very well be as massive as $900M of acquired EBITDA. That may double the dimensions of the corporate. EBITDA per share would double, to 25x 2015 ranges, as an alternative of “solely” 12.5x. And leverage would nonetheless solely be 3x.

That could be a mouthwatering prospect, coming in at a low finish of maybe $300-$400M of acquired EBITDA, all the best way as much as $900M, on this instance. ATKR’s very good administration, with its stellar M&A observe report, could also be contemplating an acquisition that may improve the incomes energy of the corporate wherever from 30% to 100%.

Thrilling, proper?

ATKR is a development firm

Atkore grows EBITDA per share at an incredible tempo, by means of natural development, stellar M&A, and enormous share buybacks, together with a 15% buyback over the previous 12 months. I present this impact within the following desk, utilizing precise knowledge by means of 2022 and my very own estimates after that. I take into account M&A to be each extremely seemingly and intensely accretive, however within the desk I do not embrace any M&A for 2023 and past. The numbers within the following desk are in tens of millions, aside from leverage and EBITDA/share.

	2015	2019	2020	2021	2022	2023	2024	2025
EBITDA	$164	$324	$327	$725	$1,342	$900	$900	$1,000
web debt		$722	$519	$200	$372	$900	$900	$1,000
share rely	62.8	48	48	47	39.7	36.4	33.4	30.4
Leverage		2.23	1.59	0.28	0.28	1.00	1.00	1.00
EBITDA/share	$2.61	$6.75	$6.81	$15.43	$33.80	$24.76	$26.95	$32.89

Click on to enlarge

ATKR has grown EBITDA/share greater than 12x from 2015 by means of 2022, a CAGR of 44%. Nevertheless, since 2022 is a windfall yr, it is best to not use 2022 to estimate the normalized development price. If we use my estimate for 2025, the ten yr EBITDA/share CAGR could be 28.8%. Observe that that is barely greater than the 27.1% 10 yr CAGR implied by the corporate’s $18 EPS steerage for 2025. It is value noting that EBITDA/share development CAGR from 2015 by means of 2019 was 26.8%. This predates any pandemic or windfall results.

ATKR’s moat

Administration at ATKR is totally first price in an business the place the competitors is weak. They run the enterprise higher, construct moats, their M&A observe report is “to die for”, they usually purchase again inventory in massive quantities – virtually half the shares excellent could have been purchased again in lower than 10 years at what has up to now been very low costs – all whereas decreasing leverage. It is such firm, however so few folks can see why.

And by folks, I imply fund managers. I used to be at lunch with a couple of of my worthy comrades a short time in the past, and the subject of an undiscovered prime quality inventory got here up. Mine was ATKR, then at about $20 a share. Once I was accomplished speaking, folks politely moved on. They did not disagree, they only gave it zero consideration. And the rationale they gave – I politely enquired later – was that it simply appeared like a commodity enterprise, and possibly China would compete. I identified that China has been round some time, and has by no means competed up to now, as a result of delivery prices are too excessive. They had been already shifting on. It is an essential perception that helps one perceive why the inventory is so low-cost.

Let’s discuss ATKR’s moat. To start with, ATKR is healthier run. Prime quality folks run the corporate, however they themselves often give credit score to the ATKR enterprise system, which is de facto simply copied from Danaher. However they imply it, and comply with it, and it really works. Being higher run means they can produce at decrease value, and ship with a quicker response time. The latter is presently an business main 4 days, and headed to only 1 day within the close to future.

Being properly run additionally makes them capable of reliably ship what they are saying they are going to. The pandemic uncovered opponents as being unable to do that, inflicting big complications for purchasers on SKU’s which are a tiny a part of their total value. Delaying development for weeks whereas they await supply of some pipe that will value a couple of hundred {dollars} has made prospects see the sunshine, and they’re prepared to pay extra for ATKR consequently. So that is the second half. They’ve earned prospects belief.

Third, delivery is an enormous element of the price for ATKR’s merchandise, so scale actually issues. ATKR has manufacturing everywhere in the nation, in order that on common, ATKR SKU’s are shipped a shorter distance than opponents merchandise. They’re a low value supplier consequently. Decrease than China – all US producers are decrease value than China – and decrease than US opponents.

Fourth, whereas ATKR has opponents in each section, it isn’t the identical competitor. Every of ATKR’s enterprise segments is competing as a part of ATKR, which suggests ATKR can ship extra SKU’s in an order, on one truck, with one supply, than anybody else can. It is extra handy for the client. And, in fact, additionally inexpensive.

The story up to now… ATKR has earned the belief of consumers with dependable supply – once more, opponents let prospects down on this – with quicker supply time, and fewer complications as a result of there’s solely a single order to course of throughout a large spectrum of merchandise. And so they can cost extra for that. And they’re additionally the low value supplier, resulting from manufacturing effectivity, scale that enables them to have the shortest delivery distance, on common, and essentially the most SKU’s in an order. That is already a recipe for durably fats margins.

And fifth, ATKR solely operates in segments which are nationwide duopolies or 3-opolies, plus often some small fries that compete regionally. Margins for opponents are usually not unhealthy.

And sixth, they proceed to roll up the small fries. Each time they do that, the moat deepens. It simply will get stronger and stronger.

And that is why their EBITDA/share CAGR is available in at over 25% for ten years utilizing normalized EBITDA. Not utilizing windfall EBITDA, if we did that it is 44%. However utilizing normalized EBITDA, greater than 25% is what they ship, with out a lot debt, with none drama. They only execute just like the deep moated firm they’re, and the outcomes are… Nicely, you inform me. What do you consider these outcomes?

ATKR is uncovered to secular development developments

ATKR described its finish markets by income in its December 2020 investor presentation on slide 6:

• 54% US non-residential development. This consists of the classes: Workplaces, Knowledge Facilities, Warehouses & Distribution Facilities, Schooling, Healthcare, Infrastructure, Retail, Accommodations and Manufacturing
• Roughly 62% of this income is from new development and the remaining is repairs and upgrades to present amenities.
• 14% US residential development
• 16% of income is from merchandise offered to OEMs
• ATKR additionally manufactures in Europe. The remaining 16% of income is assessed as “worldwide gross sales” from these amenities.

Whereas ATKR’s finish markets are clearly various, it is value noting that inside the first bullet level, US non-residential development, ATKR has appreciable publicity to well-known electrification and digitization megatrends. They provide some commentary on this of their November 2022 promote aspect presentation and FY This fall 2022 earnings presentation. Listed below are 5 examples:

• Double digit development in knowledge heart spending. Knowledge facilities use a ton of ATKR merchandise.
• Connecting electrical automobiles to the grid. “Complete answer of conduit, cabling and fittings which allow the connection {of electrical} car chargers to {the electrical} grid.”
• Solar energy. “Product capabilities wanted to assist the design and development of complicated racking constructions for solar energy methods in addition to the switch and connection of vitality into {the electrical} grid… In 2021, 46% of all new electrical capability added to the grid got here from photo voltaic.”
• Grid hardening. ATKR merchandise are used to relocate energy and communication strains underground, providing safety from all the pieces from fires in California to hurricanes in Florida.
• Broadband deployment. “$65B dedicated for broadband deployment by the Infrastructure Funding and Jobs Act.”

Valuation

I estimate $25 EPS in 2025, with 2.0x leverage. This leaves $3B of money obtainable for share repurchases and M&A, in comparison with ATKR’s present market cap of about $5B. That is a ton of money to deploy, and EPS in 2025 will rely upon simply how good the M&A is, and what worth they must pay to repurchase shares. If all this money had been for use for repurchases at a median worth of $250 – that is twice the present worth as I write this – EPS could be $22.60 in 2025. I believe they are going to get extra bang for his or her buck than that, both shopping for again shares at a lower cost, or by means of extra M&A, or each. So, $25 EPS.

And as soon as the windfall is over, with ATKR simply killing it, the times of a low a number of, misunderstood inventory, shall be over. ATKR shall be seen for what it’s and get a a number of of at the least 20. My ensuing 2025 worth goal is $500. If there’s a main acquisition, I’d seemingly have to boost that focus on meaningfully, although this may in fact rely upon the main points of the acquisition.

Dangers to the thesis

In all probability the most important dangers are a significant slowdown in non-residential development, or a rise in provide by an irrational competitor. The primary is inevitable sooner or later, since development does have components of cyclicality to it. It is actually not on the horizon over the close to time period, although, with the current Dodge Momentum Index, which predicts non-residential development 12 months prematurely, hitting an all-time excessive within the current December 2022 report. Good occasions are in all probability right here for the foreseeable future, however there’s all the time a threat that this can change.

The second threat, an irrational competitor, can be one thing to be looking out for. Irrational competitors may very well be a menace to margins, and whereas a lot much less frequent in oligopoly companies, it is nonetheless doable. Since ATKR faces totally different opponents throughout numerous enterprise segments, a single irrational competitor would in all probability not be sufficient to erase the margin of security now we have within the inventory on the present worth. It’s nonetheless a threat value keeping track of.

Conclusion

Atkore is a deep moated, rising enterprise with very low leverage, and it gushes with FCF. Administration is excellent, as evidenced by their historical past of driving margin enlargement, constructing deep moats by means of natural and inorganic actions, and delivering years of fast EBITDA development, all whereas utilizing the corporate’s substantial FCF to drive the share rely relentlessly decrease. A ten yr EBITDA/share CAGR in extra of 25% is the outcome.

And in the newest investor deck, Atkore appears to be hinting that it is at the least contemplating a significant acquisition. If that occurs, it will virtually actually lead to a significant upside case to my $500 2025 worth goal. The inventory is way too low-cost, and must be purchased.