PATK - Patrick Industries

[Shooter MacGavin]

I recently bought this stock and don't see it discussed in a lot of places.  Anyone else own this one?  It an RV/Powerboat/Residential & Industrial OEM component roll-up.  It trades around 11x run rate EPS, which has been growing 37% CAGR over the last 5 years.  Their organic sales alone outperform the industry by a large margin. 

 

This has been one of the best performing stocks in the US markets over the 8 years by a long shot. 52x since 2010.

 

Industrial names like this are a little out of my area.  For those familiar with this name, here's the question.  What gives?  How are they just constantly growing organic sales at rates that are eye-popping?  For example, consolidated revenue in the last quarter was up 49% Y/Y, 33% organic. Every quarter its the same story, and I know there's cyclical industry tailwinds, but not that large!  So I guess some of it is just cross-selling after they do acquisitions.  But still, it makes me scratch my head. I guess i really should be asking IR this.

 

They also buy back stock when they believe its cheap and the CEO owns a decent chunk.  Anyone follow this name got any thoughts?

 

Thanks.

 

 

[Cigarbutt]

Hi,

I've "discovered" the RV industry in 2012 and have followed a few names including Patrick Industries.

Their main business is RV related. Amazing results with profitable growth and increasing market share.

Impressive and almost too good to be true.

 

Not saying it is a bad investment but, since 2012, the stock has been too expensive for me.

Would say that you either should hold for the long term or catch it in a downfall as the cyclicality of the industry should not be underestimated and the "path to the future will not be linear".

Your outlook for the company may be correlated to your outlook for consumer confidence in the US.

 

Here are some potentially useful links:

http://skyscraperpage.com/forum/showthread.php?p=8146074

http://www.parkpartners.org/RVIA-Presentation.pdf

https://frank-k-martin.com/2018/07/16/future-americas-economy/#_ftn1

https://rvtravel.com/june-rv-shipments-drop-11-4-from-2017/

 

The RV industry was part of a WSJ report last April.

The RV industry (and related ones) is boring on the surface but IMO fascinating

Mr. Martin's article is pessimistic and that may be part of his personality in this new economy.

Please do not see the info provided as material for short term predictions because they are not and reported shipment numbers are typically increased later.

 

Will keep following and will look forward to your input(s).

 

 

 

[Liberty]

I've been looking at this one for maybe 2-3 years, I think it might have been Ian Cassel that wrote something about it that made me look.

 

Looks like good management and good strategy and at times a fairly cheap price, but I never felt comfortable enough with the industry and with how potentially cyclical it is to know for sure...

[Shooter MacGavin]

Hi,

I've "discovered" the RV industry in 2012 and have followed a few names including Patrick Industries.

Their main business is RV related. Amazing results with profitable growth and increasing market share.

Impressive and almost too good to be true.

 

Not saying it is a bad investment but, since 2012, the stock has been too expensive for me.

Would say that you either should hold for the long term or catch it in a downfall as the cyclicality of the industry should not be underestimated and the "path to the future will not be linear".

Your outlook for the company may be correlated to your outlook for consumer confidence in the US.

 

Here are some potentially useful links:

http://skyscraperpage.com/forum/showthread.php?p=8146074

http://www.parkpartners.org/RVIA-Presentation.pdf

https://frank-k-martin.com/2018/07/16/future-americas-economy/#_ftn1

https://rvtravel.com/june-rv-shipments-drop-11-4-from-2017/

 

The RV industry was part of a WSJ report last April.

The RV industry (and related ones) is boring on the surface but IMO fascinating

Mr. Martin's article is pessimistic and that may be part of his personality in this new economy.

Please do not see the info provided as material for short term predictions because they are not and reported shipment numbers are typically increased later.

 

Will keep following and will look forward to your input(s).

 

Cigarbutt, thanks a lot for this.  This is great. 

[Shooter MacGavin]

I've been looking at this one for maybe 2-3 years, I think it might have been Ian Cassel that wrote something about it that made me look.

 

Looks like good management and good strategy and at times a fairly cheap price, but I never felt comfortable enough with the industry and with how potentially cyclical it is to know for sure...

 

Yeah agreed.  It's definitely a cyclical industry but it has some macro tailwinds that are similar to housing and autos.  The financial crisis created a lot of "growth" industries by delaying consumption by 5-6 years.  I'm not sure how these guys, Patrick in particular, just report ridiculous organic numbers every single quarter, much stronger than industry volume numbers, which are also very strong.  There's always some price to pay, even for cyclical companies, that make them attractive investments.

 

Is it like a Transdigm pricing thing where they acquire parts suppliers and jack up prices?  I'm sure that's partly it. Is is that they are over-indexed to the stronger RV OEMs?  Some of it definitely is  due to cross-selling.  Acquire one component manufacturer that has a few relationships, and then bundle their products in with other components and sell them to a larger manufacturer base. 

 

Though they started off in RVs, they're also about 35-40% in non-RV manufacturing/distribution now. They like the marine industry where there are similar components and possibly better tailwinds due to the age of powerboats.

 

They're just kind of generic on their earnings calls in terms of organic and they haven't done an investor day to my knowledge.

[Liberty]

Yeah, I also don't understand the organic numbers, and wish I did. Have you reached out to investor relations? Curious if they have anything to say about it.

[Shooter MacGavin]

Yeah, I also don't understand the organic numbers, and wish I did. Have you reached out to investor relations? Curious if they have anything to say about it.

 

I did briefly for something else and it took them a while to get back to me.  I wanted to make sure I understood it well enough at a high level before I reach out but you're right, that's exactly what I should be doing.  I will and report back when I hear back.

[Cigarbutt]

-On the organic growth:

 

I also need to test the assumptions.

 

Looking at their last presentation, it seems to be a combination of targeted capex and geographic expansion resulting in an increasing % content of sold components to both RV and MH segments. Whatever they are doing, they are doing it well. How far can this go?

 

http://phx.corporate-ir.net/phoenix.zhtml?c=93682&p=irol-presentations

 

-On the cyclical front:

 

There is the economic or credit cycle and one needs to remember that many products they sell are highly discretionary. I also wonder how credit is now used to finance the purchase of new units at the consumer level. Under some scenarios, I find that their leverage to be quite high. In case of a slowdown, they could rapidly adjust their inventory levels but the secondary market (which is already huge) may become the destination of choice for consumers instead of the newly produced units.

 

 

There is also the "demographic" cycle. To me, the sectors that PATK serves is like country music: immensely popular but it is just hard to understand from my perspective. I've thought that the recent rise in sales was partly due to pent-up demand and also an unusual interest by the baby boomers. The industry seems to be quite enthusiastic on this front and show statistics for it but I wonder if scenarios of future growth should not be tempered to more reasonable assumptions.

http://www.rvbusiness.com/2018/03/thors-martin-look-for-more-rv-industry-growth/

[KJP]

IES Holdings (IESC) may interest you.  Jeff Gendell appears to be using the same playbook he used at Patrick Industries.  In addition, it operates in another industry that you mentioned may have tailwinds.  Todd Cleveland is on the board.

[Shooter MacGavin]

IES Holdings (IESC) may interest you.  Jeff Gendell appears to be using the same playbook he used at Patrick Industries.  In addition, it operates in another industry that you mentioned may have tailwinds.  Todd Cleveland is on the board.

 

Thanks.  Yes I actually own that one too in small amounts.  Again, their disclosure isn't great but they seem to be doing a good job so far. These industries are so far from what I know.

[Cigarbutt]

The WSJ recently had a piece on the RV industry and potential leading headwinds.

In terms of per share perceived value, shares were trading at 64 at the last post, went down to about 28 during the December scare, went back up to 55 in April and, according to the risk assessment by the company, now trade around 35 due to many reasons including the noise around tariffs.

If investing is easy, if credit availability or liquidity are not significant concerns, if one agrees that this is mostly about inventory rebalancing and weather issues, this is a company to buy at present levels because of its historical operational record, its amazing stock performance up to late 2018 and great promises related to expected growth in the leisure and lifestyle market. I agree with the above, in terms of patient and long term thinking and reasonable return expectations, but will wait for a better opportunity because of the analysis of the company, taking into account relevant industry dynamics and general trends that make it necessary, IMO, to adjust to normalized earnings.

 

PATK entered the 2007 period with 37% of revenues to manufactured housing and 35% of revenues to recreational vehicles and a sales to debt ratio of 5.3 and an inventory to sales ratio of 0.10. With the cyclical downturn affecting all their segments, once stuck between a rock and a hard place, they did very well operationally (cutting costs, downsizing, working capital management) and financially (asset sale {they were owning facilities then vs leasing}, raising opportunistic debt and some equity). Sales went from 435.2M in 2007 to 212.5M in 2009 and share went from 18.30 to 0.25 in late 2018 and traded in the 0.01 to 0.80 range in Q1 2019. So, they survived.

 

After, they entered a growth phase, organic to some degree but mostly due to acquisitions. From 2010 to now, they have completed 42 acquisitions (57 companies). This resulted in very significant top-line growth and some improvement in the net profit margin (2013: 4.0%, 2018: 5.3%). The expansion has been concentrated in the RV manufacturing segment, up to 69% of sales in 2017 and more recently, the marine segment has become mor important (18% of sales Q2 2019). To fund the acquisitions, they have used internally generated cashflows and debt (a lot of debt).

 

Acquisition multiple: Reported annualized revenue of acquired over price paid by acquirer

-2012: 2.7    2013: 2.5    2014: 1.8    2015: 1.7    2016: 1.2    2017: 1.2    2018:1.7

The numbers dealing with the component of goodwill and intangibles to price paid tell the same story. IMO, they increasingly paid more for their acquisitions and it is possible that more recent acquisitions were made in a late-cycle period when more restraint should have been applied. For example, they reported, in 2018, annualized revenues from the 2018 acquisitions of 568M. Assuming no organic growth, one would have expected additional revenues of 142M per quarter in 2019. Actual revenue increase in Q1 2019: 64.7M, in Q2 2019: 8.3M.

 

They are navigating this leg of the cycle (numbers end 2018) with a sales to debt ratio of 3.6 and an inventory to sales ratio of 0.12. In the last two years, they have produced high cash flow levels but IMO, those cashflows should be normalized for the cycle and, even if interest rates remain overall low, the spread for their debt may increase significantly. In 2018, they issued a 5-year convertible bond yielding 1% (1% coupon but the bond was issued at a discount) with a conversion feature at 2.5x today's price level. They have a mountain of debt maturities due in 2022.

 

Interestingly, in 2017, they issued 2.025M shares reflecting a net price of 48.67 per share in order to continue their expansion while maximizing their capital structure and, in 2018, they bought back 1.984M shares at an avg price of 54.21.

 

What's the point? PATK is involved in cyclical industries and there is a credit cycle going on.

 

Their biggest exposure is the RV industry. Similar dynamics are at play in the marine segment and also, to some degree, in their other manufacturing and distribution segments.

https://www.rvia.org/historical-rv-data

From anecdotal, scuttlebutt, historical, common sense and industry review, RVs and boats are extremely discretionary expenses. Most RVs are financed. I come to the conclusion that there is significant over-capacity and built-in inverse pent up demand. I find that PATK may be hit by a triple whammy as they 1-levered their balance to a very significant degree, in an industry where 2-customers used significant leverage to buy highly discretionary items and 3-in an environment where capital is felt to be abundant, cheap and permanent. In 2018, RV shipments were down 4.1%. 2019 appears to be a moving target with a present 'forecast' at -17.1%.

 

There are many ways to slice this. I will not short this individual name and, in fact, think that it will survive. I find that the way to discount and weigh the possibilities and different scenarios also involve looking at overall trends.

https://data.sca.isr.umich.edu/get-chart.php?y=2019&m=5&n=35h&d=ylch&f=pdf&k=49d8425d7376c9a8f85b994ef675634b6cddea0dcb4acfd80acf1698a4116e6b

I may be wrong but suggest that the share price could come lower, much lower.