PGT Innovations stock: low net income hides strong FCF (NYSE: PGTI)

Introduction

PGT Innovations (NYSE: PGTI) manufactures windows and doors in the premium segment and as such its performance is generally closely linked to the housing market, with new construction and renovations of existing housing being the main drivers of company sales. Its 2021 results were good and the company was targeting 30-48% EBITDA growth in 2022. However, although PGTI has already raised prices for its customers, inflation and supply chain issues could impact this year’s margins and EBITDA.

How was 2021?

2021 was a great year for PGTI as its revenue grew by a double-digit percentage to $1.16 billion from less than $883 million the previous year. Cost of sales also rose, but gross profit jumped more than 25% to nearly $404 million. Since there were also no restructuring charges or impairment charges to record, operating income rose from just under $85 million to over $100 million, an increase of 18, 9%. That’s great, but it also means there’s been some pressure on margins, as the operating margin came in at 8.65%, down from 9.6% (and that operating margin 9.6% in 2020 included $12.2 million of restructuring and impairment charges).

The net result shows net income of $35.2M of which $2.3M is attributable to non-controlling interests, leaving $32.9M on the table for PGT Innovations shareholders. That’s a 30% decrease from fiscal 2020, but PGTO recorded a one-time charge of $25.5 million related to the prepayment of debt in 2021. EPS for fiscal 2021 doesn’t was only $0.45 due to the combination of a slightly higher number of shares and a one-time change in the redemption value of non-controlling interests.

You might be wondering why PGTI is trading at almost 40 times its net profit. But the explanation is simple because the reported net income attributable to PGTI shareholders is impacted by several non-recurring and non-cash items. The cash flow statement will allow me to explain this better.

We see that the company reported operating cash flow of almost $64 million, despite investing $69.1 million in some working capital items. Adjusted operating cash flow was $132.8 million. Note that this excludes one-time debt extinguishment charges and change in redemption value.

Total capex was only $33.4 million, resulting in net free cash flow of $98.5 million on an underlying basis. Of course, the “true” free cash flow was lower, as PGTI still had to pay $21.5 million to cover the call premium of its senior notes. But the $98.5 million is the “normalized” underlying free cash flow. We might also have to deduct the $7.6 million in deferred taxes, so on an underlying basis, PGTI generated $91 million in free cash flow. It’s $1.43 per share.

2022 should be a year of double-digit revenue and EBITDA growth – at least that’s the plan

When PGT Innovations announced its results for 2021, it also immediately provided direction for 2022.

Revenue is expected to fall from $1.16B to $1.35-1.45B. The midpoint of this range represents a 20% increase in revenue. Part of this increase will be organic, another part will be contributed by the acquisitions of Eco and Anlin which will now begin to contribute for an entire fiscal year (compared to only $107 million in fiscal year 2021, the acquisitions closed in February and October respectively) .

EBITDA will jump even bigger. Adjusted EBITDA for fiscal 2021 was $169 million and although this is already a 13% increase over the prior year, PGTI was forecasting a massive increase to $220-250 million. dollars. At the high end of this forecast, Adjusted EBITDA would increase by almost 50%.

This guidance was published two months ago, in February. Over the past two months, several things have happened and while PGTI should not be affected by the issues in Europe, the strength of the supply chain, and more importantly, inflation, will be key. for PGTI. I don’t think the company should be expected to hit the upper end of its EBITDA guidance, as it will be a tough year for many companies. If PGTI can raise some prices based on the inflation numbers, the revenue target will easily be met, but I think we should expect the company’s EBITDA to be at the lower end of its forecasts. Of course, it would be great to see a positive surprise, but I see more risk than tailwinds right now.

Investment thesis

PGTI’s revenue and performance will be closely tied to the situation in the United States, but recent acquisitions will undoubtedly push underlying free cash flow to over $100 million this year, although PGT Innovations would miss slightly. the lower part of its EBITDA forecast. This will allow a rapid reduction in net debt ($530 million) even if rents will increase following recent acquisitions. The debt refinancing was a good move and interest charges are expected to drop to around $26-27 million this year.

I currently have no position in PGTI, but may write put options in the near future. A P17.5 expiring in August has an option premium greater than $1.50, meaning the effective purchase price would be less than $16 for a free cash flow yield greater than 10% if the stock is trading below $17.50 on the expiration date. .

But as interest rates have gone up, I may also try to buy some of the company’s debt. The 4.375% bond due October 2029 is currently trading at 91 cents on the dollar for a yield to maturity of just over 5.8%. Given the company’s strong cash flow performance, I think it’s a good deal.