Buy Fast Growing, Deep Moated Atkore At 5 Times 2025 Earnings (ATKR)

Atkore Inc. (NYSE:ATKR) is a dominant manufacturer of metal conduits, PVC, armored cable, and related products across the U.S. and Europe. The company operates primarily in oligopoly markets with at most 2 large competitors in a given segment and is itself #1 or #2 in most of them. This no doubt partly explains their persistently high margins.

Atkore was a poorly managed division of Tyco until late 2010, when it was acquired by CBR, and later became public in 2016. After the spin, the company was initially led by John Williamson, a 17 year Danaher (DHR) veteran. Williamson retired in 2018 and was replaced as CEO by his COO, Bill Waltz. Under Williamson and Waltz, the company divested business segments that suffered from too much competition and, through a disciplined acquisition strategy, rolled up other segments to create deep moats. A perfect example of this is their PVC segment, where they are currently #1 in the U.S. out of 2 large operators. The PVC segment was created almost entirely inorganically, and is an excellent, deep moated business.

Management is superb, growing EBITDA per share at a 27% CAGR from 2015 through 2019 though organic growth, stellar M&A, and share buybacks, all while reducing leverage. The company is currently experiencing windfall profits, with earnings up 6x from 2019 levels, which is confusing some investors into thinking that all growth is due to the windfall. This is dead wrong. Atkore made this clear by guiding $18 EPS in 2025, a 31% CAGR from 2019. And management is very conservative with guidance. They always beat. Always.

$18 2025 EPS guidance

While I have argued that ATKR is a high quality, deep moated growth company for some time, this fact has been obscured by the windfall profit conditions in 2022. As a result, ATKR traded as low as $71 as recently as September 27, 2022, despite being on track for what turned out to be more than $21 EPS. With a strong track record of growth and very little leverage – they ended the year with debt/EBITDA at 0.28x – this price only made sense if earnings would decline dramatically from 2022 levels once windfall conditions recede.

And recede they will. ATKR will surely lose some of the margin gains they have achieved during the windfall conditions. On the other hand, ATKR is experiencing robust underlying growth, completely aside from any windfall. With a secular growth tailwind, and the easing of windfall conditions, the question on investors’ minds was: what would earnings look like once the windfall ended?

The company addressed this issue head on in its FY Q4 2022 earnings release on slide 12, calling out normalized, non-windfall EBITDA of $757M for 2022, more than double the number for 2019. They also guided to $18 EPS for 2025. Management has a history of offering decidedly conservative guidance, which they then always beat, so this is all probably best thought of as a lowball estimate.

A digression on windfall profits, and WIRE

As an example where the story really may be all about windfall earnings, let’s digress briefly and look at WIRE. In a recent investor presentation – they’ve changed it since then, so I can’t link it, unfortunately – they had a slide pointing out that, from 2011 to 2021, EBITDA had grown at a 23.1% CAGR. Highlighted and everything. Time to take a victory lap?

Not so fast! EBITDA from 2011 to 2019 was actually flat, very different from ATKR’s almost 27% EBITDA/share CAGR before the windfall. WIRE EBITDA trended instead at about $100M EBITDA, give or take, and then $118M, and then $723M in 2021. And yes, using $723M, I guess it is a 23.1% CAGR. But this is super misleading. The market cap at WIRE is $2.9B and no debt. I really don’t know what normalized EBITDA at WIRE will be once the windfall conditions return to normal, but there is a very real danger that WIRE is trading at 25x normalized EBITDA right now.

And that is just so different from ATKR. ATKR has been growing the whole time, for reasons that I will get into. And ATKR’s 44% CAGR since 2015 (they were private before that) is a lot more than 23.1%, if we want to compare apples to apples, using windfall year 2022 for both companies.

But the point is, the market is confusing ATKR benefitting from the windfall – which they are – with WIRE benefitting from the windfall. In the latter case that may be the whole story. But for ATKR it’s just a bump – a nice bump, to be sure – on a secular growth trajectory that was in place before the windfall, and which is still in place today. The market is missing this.

A major accretive acquisition may be coming

ATKR has a stellar M&A track record. The company’s deep moats were created by executing a roll up to help create oligopoly markets, and by exiting markets where competition would never allow for high returns. How good have the acquisitions been? Here’s CEO Bill Waltz commenting about this on the FY Q4 2022 earnings call:

We deployed $649 million in M&A between FY 2017 and FY 2022… That group of deals traded at a combined result of less than 1x revenue and less than 2x adjusted EBITDA in 2022, representing a tremendous synergy improvement driven by the execution of our Atkore Business System.

They bought at what turned out to be 2x EBITDA, after synergies. By rolling up less efficient facilities, turning the crank on the Atkore Business System – this is like the Danaher Business System, it’s practically a carbon copy of it – and taking advantage of scale and other synergies, and of the resulting oligopoly, they are acquiring at 2x EBITDA.

ATKR’s balance sheet is very strong, with $372M of net debt against $900M of EBITDA at 2023 non-windfall midpoint guidance. ATKR targets a debt to EBITDA ratio of 2x or below, leaving them with $1.4B of balance sheet available for M&A. $1.4B, plus more than $500M of FCF being generated each year, that could be put toward M&A if they want to.

And there is a tantalizing change, introduced for the first time, on the FY Q4 2022 earnings presentation, slide 28, titled “Updated Capital Deployment Framework”. Previous versions of this slide have referenced the 2x leverage target, but the most recent deck says:

Maintain Gross Debt to normalized Adj. EBITDA ratio at ~2x or below; willing to go above for select strategic opportunities

Emphasis mine. This phrase, referencing a willingness to exceed the 2x leverage limit for select strategic opportunities, is brand new.

So… ATKR is generating in excess of $500M of FCF a year, and has more than $1.4B of balance sheet available to them before they approach the 2x leverage target. But they want us to know that they might break through that target for the right deal.

That’s a pretty big acquisition that they are considering! How big? Well, if they were to make an acquisition at, say, 6x EBITDA, they would have to buy $350M of EBITDA in order to reach 2x leverage, even before considering any FCF they generate before the deal closes.

But they are considering exceeding 2x leverage, and they will be generating FCF. An acquisition that closes in late 2023 – giving them time to generate more cash – could be as large as $900M of acquired EBITDA. That would double the size of the company. EBITDA per share would double, to 25x 2015 levels, instead of “only” 12.5x. And leverage would still only be 3x.

That is a mouthwatering prospect, coming in at a low end of perhaps $300-$400M of acquired EBITDA, all the way up to $900M, in this example. ATKR’s superb management, with its stellar M&A track record, may be considering an acquisition that would increase the earning power of the company anywhere from 30% to 100%.

Exciting, right?

ATKR is a growth company

Atkore grows EBITDA per share at a tremendous pace, through organic growth, stellar M&A, and large share buybacks, including a 15% buyback over the past 12 months. I show this effect in the following table, using actual data through 2022 and my own estimates after that. I consider M&A to be both highly likely and extremely accretive, but in the table I don’t include any M&A for 2023 and beyond. The numbers in the following table are in millions, except for leverage and EBITDA/share.

	2015	2019	2020	2021	2022	2023	2024	2025
EBITDA	$164	$324	$327	$725	$1,342	$900	$900	$1,000
net debt		$722	$519	$200	$372	$900	$900	$1,000
share count	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 to enlarge

ATKR has grown EBITDA/share more than 12x from 2015 through 2022, a CAGR of 44%. However, since 2022 is a windfall year, it’s best not to use 2022 to estimate the normalized growth rate. If we use my estimate for 2025, the 10 year EBITDA/share CAGR would be 28.8%. Note that this is slightly more than the 27.1% 10 year CAGR implied by the company’s $18 EPS guidance for 2025. It’s worth noting that EBITDA/share growth CAGR from 2015 through 2019 was 26.8%. This predates any pandemic or windfall effects.

ATKR’s moat

Management at ATKR is absolutely first rate in an industry where the competition is weak. They run the business better, build moats, their M&A track record is “to die for”, and they buy back stock in large amounts – almost half the shares outstanding will have been bought back in less than 10 years at what has so far been very low prices – all while reducing leverage. It’s such a good company, but so few people can see why.

And by people, I mean fund managers. I was at lunch with a few of my worthy comrades a little while ago, and the topic of an undiscovered high quality stock came up. Mine was ATKR, then at about $20 a share. When I was done talking, people politely moved on. They didn’t disagree, they just gave it zero consideration. And the reason they gave – I politely enquired later – was that it just seemed like a commodity business, and maybe China would compete. I pointed out that China has been around a while, and has never competed so far, because shipping costs are too high. They were already moving on. It’s an important insight that helps one understand why the stock is so cheap.

Let’s talk about ATKR’s moat. To begin with, ATKR is better run. High quality people run the company, but they themselves usually give credit to the ATKR business system, which is really just copied from Danaher. But they mean it, and follow it, and it works. Being better run means they are able to produce at lower cost, and deliver with a faster response time. The latter is currently an industry leading 4 days, and headed to just 1 day in the near future.

Being well run also makes them able to reliably deliver what they say they will. The pandemic exposed competitors as being unable to do this, causing huge headaches for customers on SKU’s that are a tiny part of their overall cost. Delaying construction for weeks while they await delivery of some pipe that may cost a few hundred dollars has made customers see the light, and they are willing to pay more for ATKR as a result. So that’s the second part. They have earned customers trust.

Third, shipping is a big component of the cost for ATKR’s products, so scale really matters. ATKR has manufacturing all over the country, so that on average, ATKR SKU’s are shipped a shorter distance than competitors products. They are a low cost provider as a result. Lower than China – all US producers are lower cost than China – and lower than US competitors.

Fourth, while ATKR has competitors in every segment, it’s not the same competitor. Each of ATKR’s business segments is competing as part of ATKR, which means ATKR can deliver more SKU’s in an order, on one truck, with one delivery, than anyone else can. It’s more convenient for the customer. And, of course, also less expensive.

The story so far… ATKR has earned the trust of customers with reliable delivery – again, competitors let customers down on this – with faster delivery time, and fewer headaches because there’s only a single order to process across a wide spectrum of products. And they can charge more for that. And they are also the low cost provider, due to manufacturing efficiency, scale that allows them to have the shortest shipping distance, on average, and the most SKU’s in an order. This is already a recipe for durably fat margins.

And fifth, ATKR only operates in segments that are national duopolies or 3-opolies, plus usually some small fries that compete locally. Margins for competitors are not bad.

And sixth, they continue to roll up the small fries. Every time they do this, the moat deepens. It just gets stronger and stronger.

And this is why their EBITDA/share CAGR comes in at over 25% for ten years using normalized EBITDA. Not using windfall EBITDA, if we did that it’s 44%. But using normalized EBITDA, more than 25% is what they deliver, without much debt, without any drama. They just execute like the deep moated company they are, and the results are… Well, you tell me. What do you think of these results?

ATKR is exposed to secular growth trends

ATKR described its end markets by revenue in its December 2020 investor presentation on slide 6:

• 54% US non-residential construction. This includes the categories: Offices, Data Centers, Warehouses & Distribution Centers, Education, Healthcare, Infrastructure, Retail, Hotels and Manufacturing
• Roughly 62% of this revenue is from new construction and the rest is repairs and upgrades to existing facilities.
• 14% US residential construction
• 16% of revenue is from products sold to OEMs
• ATKR also manufactures in Europe. The remaining 16% of revenue is classified as “international sales” from these facilities.

While ATKR’s end markets are obviously diverse, it’s worth noting that within the first bullet point, US non-residential construction, ATKR has considerable exposure to well-known electrification and digitization megatrends. They offer some commentary on this in their November 2022 sell side presentation and FY Q4 2022 earnings presentation. Here are 5 examples:

• Double digit growth in data center spending. Data centers use a ton of ATKR products.
• Connecting electric vehicles to the grid. “Comprehensive solution of conduit, cabling and fittings which enable the connection of electrical vehicle chargers to the electrical grid.”
• Solar power. “Product capabilities needed to support the design and construction of complex racking structures for solar power systems as well as the transfer and connection of energy into the electrical grid… In 2021, 46% of all new electric capacity added to the grid came from solar.”
• Grid hardening. ATKR products are used to relocate power and communication lines underground, offering protection from everything from fires in California to hurricanes in Florida.
• Broadband deployment. “$65B committed for broadband deployment by the Infrastructure Investment and Jobs Act.”

Valuation

I estimate $25 EPS in 2025, with 2.0x leverage. This leaves $3B of cash available for share repurchases and M&A, compared to ATKR’s current market cap of about $5B. That’s a ton of cash to deploy, and EPS in 2025 will depend on just how good the M&A is, and what price they will have to pay to repurchase shares. If all this cash were to be used for repurchases at an average price of $250 – that’s twice the current price as I write this – EPS would be $22.60 in 2025. I think they will get more bang for their buck than that, either buying back shares at a lower price, or through more M&A, or both. So, $25 EPS.

And once the windfall is over, with ATKR just killing it, the days of a low multiple, misunderstood stock, will be over. ATKR will be seen for what it is and get a multiple of at least 20. My resulting 2025 price target is $500. If there is a major acquisition, I would likely have to raise that target meaningfully, though this would of course depend on the details of the acquisition.

Risks to the thesis

Probably the biggest risks are a major slowdown in non-residential construction, or an increase in supply by an irrational competitor. The first is inevitable at some point, since construction does have elements of cyclicality to it. It’s certainly not on the horizon over the near term, though, with the recent Dodge Momentum Index, which predicts non-residential construction 12 months in advance, hitting an all-time high in the recent December 2022 report. Good times are probably here for the foreseeable future, but there’s always a risk that this will change.

The second risk, an irrational competitor, is also something to be on the lookout for. Irrational competition could be a threat to margins, and while much less common in oligopoly businesses, it’s still possible. Since ATKR faces different competitors across various business segments, a single irrational competitor would probably not be enough to erase the margin of safety we have in the stock at the current price. It is nevertheless a risk worth keeping an eye on.

Conclusion

Atkore is a deep moated, growing business with very low leverage, and it gushes with FCF. Management is outstanding, as evidenced by their history of driving margin expansion, building deep moats through organic and inorganic actions, and delivering years of rapid EBITDA growth, all while using the company’s substantial FCF to drive the share count relentlessly lower. A 10 year EBITDA/share CAGR in excess of 25% is the result.

And in the most recent investor deck, Atkore seems to be hinting that it’s at least considering a major acquisition. If that happens, it would almost certainly result in a meaningful upside case to my $500 2025 price target. The stock is far too cheap, and should be bought.