Atkore Inc. (NYSE:ATKR ) is the largest individual holding in my portfolio and my top pick for 2023. ATKR has everything that I look for in a long-term investment. The company has a boring but effective business model that gives it a competitive advantage in the marketplace. ATKR generates ample free cash flow and has a management team that I trust to reinvest capital back into the business in a way that benefits shareholders. Finally, ATKR is trading at an appealing valuation relative to both its recent performance and long-term potential. In this article, I will discuss ATKR's business model, expound on why I think it is a good investment, and walk through my thoughts on valuation.
ATKR manufactures framing and infrastructure components to support electrical systems for non-residential construction, repair, and remodeling customers. The company manufactures a wide suite of products to address this market, including everything from galvanized metal tubing and armored cabling to cable tray loaders and PVC conduits. Wherever there is electrical infrastructure, there is room for an ATKR product to be installed to help electricity flow efficiently and safely. The company provides a helpful visual in its investor presentation that highlights its wide array of products: Bs4568 Pipe Bending Machine
Atkore's Product Suite (Q4 2022 Earnings Presentation)
Atkore's Product Suite (Q4 2022 Earnings Presentation)
ATKR's sales are concentrated in the USA (90%), but they have a diverse customer base. ATKR's top ten customers make up only 38% of total sales.
ATKR markets its products through core brands and numerous small subsidiaries and has been growing its portfolio over the years via small acquisitions. All of the core portfolio subsidiaries have been in the market for at least 25 years, with the average brand having been in business for over 60 years. Management estimates that they are either #1 or #2 in market share across all of their core brands, with an average market share of 35%.
ATKR's market-leading position and a wide variety of product offerings create a compelling value proposition for their customers. ATKR is a trusted name in the industry and the "default" option for many products. By bundling product offerings together they can streamline the construction process for customers. Rather than needing to work with a different vendor for each component of a project, ATKR can meet the majority of a project's electrical infrastructure needs. This allows them to lower overall costs for their customers while maintaining higher profit margins. When inflationary pressure was ramping up in early 2022 ATKR was able to pass along 100% of the increased input costs to consumers via price increases; I see this as evidence of their pricing power and favorable position in the marketplace.
ATKR has heavy exposure to broader economic tailwinds. Between the Infrastructure Investment Jobs Act, the CHIPS and Science Act, and the Inflation Reduction Act, over $1 trillion in new infrastructure spending will be finding its way into the American economy in the coming years. There is also a large push in manufacturing to "reshore" work in the United States that has previously been done overseas. ATKR will benefit from these bills and the reshoring trend, as their products are components in many of these projects. ATKR components can be found in everything from factories and warehouses to data centers and commercial solar arrays. If US manufacturing is booming, ATKR will be booming right along with it.
ATKR has great products, strong market positioning, and strong tailwinds propelling it forward into 2023. It is hard to overstate just how well ATKR has been performing of late:
Atkore Performance Metrics (Q4 Earnings Presentation)
Atkore Performance Metrics (Q4 Earnings Presentation)
ATKR generates ample free cash flow, has the ability to reinvest that cash into the business at a high rate of return, and has shareholder-aligned management that I trust to make effective capital allocation decisions.
First and foremost, ATKR consistently generates free cash flow:
Atkore's Cash Flow Generation (Seeking Alpha)
Atkore's Cash Flow Generation (Seeking Alpha)
Fiscal 2022 was a record-breaking year for ATKR by just about any metric, but I am most impressed by their $650mm of free cash flow. Management spends a lot of time talking about adjusted EBITDA, which came in at over $1.3b and adds taxes, share-based compensation, and interest expense back to net income. Adjusted EBITDA does a good job of highlighting the company's operational strength, but I'm most interested in cash flow because it is this cash that is going to be used to grow the business.
ATKR has a three-pronged approach to deploying their excess cash: internal infrastructure investment, M&A, and stock repurchases.
Atkore Capital Deployment Plan (Q4 Earnings Call Presentation)
Atkore Capital Deployment Plan (Q4 Earnings Call Presentation)
ATKR deployed capital in all three areas in fiscal 2022. The company continues to develop new product lines within their existing subsidiaries and is investing capital to grow their footprint in new geographical locations. As an example, ATKR is building new facilities in Arizona and Indiana to ramp up their capacity to produce components for solar arrays and other solar-focused projects. I have confidence that using cash to grow market share in a growing industry like solar will yield solid returns in the future.
ATKR spent $300mm on acquisitions in fiscal 2022. The company's recent focus has been to acquire smaller players in the high-density polyethylene (HDPE) pipe and conduit space to gain access to that market. United Poly Systems was their largest acquisition in 2022, coming in at roughly $200mm. HDPE pipe is a type of flexible plastic pipe used for fluid and gas transfer and is often used to replace aging concrete or steel pipelines. This market is expected to benefit from increased infrastructure spending in the years ahead.
Finally, ATKR has been using cash flow to buy back stock. The company used $500mm of cash to repurchase 4.6mm shares in 2022 at an average price of $108/share. These actions reduced the company's share count by a full 10%, and there is still another $800mm remaining on the approved repurchase program. ATKR's current earnings yield is over 15% and the company's share price is right around $120/share at the time of this writing, so the share repurchases are generating a solid return on investment for shareholders.
ATKR's recent history of effective capital allocation is the byproduct of their management team. ATKR is led by CEO William Waltz. Waltz joined the company in 2013 as president of the Plastic Pipe and Conduit division and became CEO in 2018. He has more than 25 years of industry experience, an MBA and a Master's degree in computer science, and a bachelor's in Industrial Engineering. CFO David Johnson also has extensive industry experience, having worked at Eaton Corporation (ETN) (a competitor of ATKR's) for 24 years before joining the company in 2018. Both have clear goals when it comes to running and growing the company and I appreciate their insights and candor on earnings calls. Management's track record speaks for itself; since 2018 revenue is up 113%, net income is up 560%, and free cash flow is up over 500%.
ATKR is a great business that continues to trade at a cheap price. It is at this point that we need to talk about "normalized" earnings and cash flow. The main critique I have seen of ATKR is that it has just gotten lucky and disproportionally benefited from the Covid commodity boom. The argument goes that once commodity pricing (PVC pricing in particular) goes back to normal, ATKR's earnings are going to plummet and the company will look overvalued. ATKR looks cheap at a trailing PE of 6, but if revenue and earnings revert to 2019 levels, for example, then ATKR's PE ratio would balloon to 32.
ATKR has unquestionably benefited from price increases over the last two years. Management included a sales and EBITDA bridge diagram in the latest earnings call slides that makes this very clear:
Historical Sales and EBITDA Bridge (Q4 Earnings Slides)
Historical Sales and EBITDA Bridge (Q4 Earnings Slides)
As much as I have praised the company's M&A strategy, acquisitions account for just a fraction of ATKR's revenue and earnings growth when compared to the effect of price increases. Management fully anticipates an eventual regression in price performance and has guided fiscal 2023 revenues to be down as much as 10% compared to 2022. Earnings per share and cash flow are also expected to regress in 2023, with management estimating that earnings per share will sit somewhere between $13 and $15. Management was confident enough about the backlog and industry tailwinds to provide an $18 EPS target for 2025. I think the broader market isn't giving ATKR enough credit for their investments in future growth and is overestimating how far revenue will fall if pricing normalizes.
I think management's estimates are conservative for two reasons. At the end of ATKR's fiscal 2021 management was lowering expectations for 2022's performance due to a projected decrease in pricing. PVC pricing remained surprisingly strong throughout 2022 and the company's results vastly exceeded expectations. There is clear evidence that PVC prices worldwide are starting to decline (source) but if the decline is slower than expected, 2023 could be another year of exceeded expectations. Secondly, it is difficult to estimate exactly how much ATKR will benefit from planned government spending on infrastructure in 2023. I think management has been cautious about promising too much of a gain from this spending, especially in an environment where there is the fear that a broad-based recession might be on the horizon.
Despite my suspicions that management might be sandbagging estimates, ATKR still looks pretty cheap. I believe ATKR is an exceptional business run by capable managers that has room for long-term growth, and as such, I think a PE ratio of at least 15, applied to "normalized" earnings, is appropriate. Using the low end of management's 2023 EPS estimates ($13/share), this results in a price target of $195. This is nearly 63% above ATKR's current share price of $120, and that is using conservative estimates. Management's 2025 EPS estimate of $18/share would deserve a share price of $270, resulting in a 125% gain over the next three years (a very appealing 30% compound annual growth rate).
I see two key risks to the investment thesis. First, it is undeniable that ATKR has benefited from strong pricing power, especially in its PVC products. Management expects PVC pricing to soften in 2023, but they expect to be able to retain at least 40% of the pricing gains realized in 2022. This estimate could turn out to be overly optimistic. If pricing drops back to 2019 levels ATKR will still be profitable but its earning power and free cash flow will be diminished. A lower earnings base would depress my valuation estimates.
Second, my price target relies on the market assigning ATKR an earnings multiple of at least 15. I think this is a reasonable expectation, especially if the company continues to perform well even as PVC pricing declines. However, despite a strong fiscal Q4 report last month ATKR currently trades at a PE of 6. If market sentiment doesn't improve on ATKR then share price appreciation will be limited.
ATKR carries about $760mm of long-term debt on their balance sheet, but their robust cash flow and comfortable repayment schedule (only $325mm in lump-sum repayments are due within the next five years) make me very comfortable with them carrying this level of debt. I don't see ATKR's leverage as a meaningful risk.
ATKR is a great company trading at a cheap price. 2023 operating results are expected to underperform those of 2022, but ATKR is still trading too cheaply given the strength of the underlying business. There are a few companies in my portfolio that might have a better year than ATKR, but if I had to pick just one company to own in 2023, I would pick ATKR.
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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.
Portable Pipe Bender Additional disclosure: This article should not be taken as financial advice, it is only an expression of my own opinions as an individual investor.