Atkore Stock: Deep Dive Into Management, Growth Strategies, Valuation Concerns (NYSE:ATKR)

Atkore Inc. operates within the electrical raceway market, offering a diverse product line to a broad customer base, including global electrical distributors, independent electrical distributors, and big-box retailers. While the company enjoys strong partnerships and actively supports alternative energy OEMs, several key factors raise concerns.

Management, under the guidance of President and CEO William E. Waltz, has been observed selling shares during an ongoing repurchasing program, raising concerns among some insiders. The company’s primary moat, becomes a drawback as international expansion faces challenges due to escalating shipping costs. Atkore’s growth strategy leans significantly on acquisitions, underscoring an acknowledgment that organic growth could be constrained in a relatively slow-moving industry. Since its transition to a public company in June 2016, Atkore has successfully completed a total of 16 acquisitions, as illustrated in the image below, with the pace notably increasing, evident from the acquisition of five companies in 2022 alone. This strategic emphasis on acquisitions suggests a proactive approach to expanding market presence and diversifying offerings, recognizing the potential limitations of relying solely on organic growth in the current industry landscape.

The valuation analysis, especially utilizing the discounted cash flow method, raises apprehensions about potential overvaluation. Given the company’s susceptibility to economic indicators, coupled with modest growth in non-residential construction and potential challenges in the construction sector, I am not inclined to recommend investing in the company at this time. Moreover, if I were holding shares of the company, I would consider selling them, as I perceive a risk of overvaluation.

The Company

Atkore Inc. specializes in the manufacturing and global distribution of electrical raceway products and Mechanical Products and Solutions. Its comprehensive product line encompasses electrical conduits and fittings, armored cables and fittings, as well as cable trays and mounting systems and fittings. In addition to electrical raceway products, the company offers a range of MP&S products, including metal framing and fittings, mechanical pipes, and barbed tapes. Complementing its product offerings, Atkore provides construction services that span design, fabrication, installation, modular support structures, and fall protection.

Under various well-known brands such as Allied Tube & Conduit, AFC Cable Systems, Heritage Plastics, Unistrut, Power-Strut, Cope, and Calpipe, among others. The company caters to diverse end markets, including new construction, maintenance, repair, and remodel projects, infrastructure development, diversified industrials, alternative power generation, healthcare, data centers, and government initiatives. Its clientele comprises electrical, industrial, and mechanical contractors, as well as original equipment manufacturers.

Previously known as Atkore International Group Inc., the company underwent a name change to Atkore Inc. in February 2021. Atkore Inc. is headquartered in Harvey, Illinois.

Revenue Streams

Atkore’s revenue composition reveals a significant focus on the sale of electrical equipment, contributing to approximately 77% of its total revenue, amounting to around $3 billion. The primary market driving this revenue stream is the United States, where Atkore generates a substantial 91% of its total revenue.

Customers

Atkore tailors its sales and marketing strategies to cater to a diverse customer base, serving as a valued partner for global electrical distributors such as Consolidated Electrical Distributors, Inc., Graybar Electric Company, Rexel, Sonepar S.A., and Wesco International, Inc. Independent electrical distributors, including super-regional players like U.S. Electrical Services Inc., Crescent Electric Supply Co., and United Electric Supply Company, Inc., also find Atkore as a trusted collaborator. In addition, the company engages with members of prominent buying groups, including Affiliated Distributors, Inc., IMARK Group, Inc., and STAFDA. Atkore extends its reach to industrial distributors and partners with big-box retailers like The Home Depot, Inc. Furthermore, for many of the more than 13,000 electrical-distributor branches in the United States, Atkore’s products are considered must-stock lines that form a staple of their business. The company also actively supports alternative energy OEMs, playing a crucial role in various applications within the solar system infrastructure sector.

Management

William E. Waltz has been serving as the President and Chief Executive Officer of Atkore since 2018, bringing his expertise and leadership to the company since 2013. Meanwhile, David P. Johnson has held the position of Chief Financial Officer since 2018, contributing to the financial stewardship of the organization.

Ownership

It does raise some concerns when the majority of outstanding shares are owned by institutions, with the CEO holding a relatively small percentage.

The notable trend of insiders exercising options and promptly selling their shares, particularly when considered in conjunction with the ongoing share repurchasing program, is worth highlighting. While there have been 11 sales since February 2023, it’s important to note that a minority of insiders have also engaged in share purchases, followed by subsequent sales. This mixed pattern of insider transactions might indicate varying perspectives. It’s a factor worth considering when evaluating both management and the overall financial health of the company.

Moat

Atkore’s primary moat, its ability to produce cost-effective products in large quantities with high quality, is also a potential drawback. The challenge lies in the difficulty of expanding organically into other markets due to the inherent cost escalation associated with shipping its products internationally. The competitive advantage of cost-effective mass production becomes a limitation when geographical expansion is hindered by increased shipping costs. As a result, Atkore primarily faces competition at the local level rather than from Chinese alternatives, highlighting the intricate relationship between its competitive advantage and the challenges of global market expansion.

Growth

Atkore’s recent 8-K report reaffirms its commitment to the Capital Deployment Framework, outlining a strategic allocation of funds. Notably, around $200 million is earmarked for organic growth through capital spending.

In parallel, the company has demonstrated a robust commitment, with over $1 billion dedicated to share repurchases and mergers and acquisitions endeavors. The substantial investment, including the deployment of $915 million for share repurchases, indicates a proactive approach to managing its own stock. Additionally, Atkore views acquiring other companies as a pivotal strategy to instigate meaningful change and drive overall growth.

This strategic direction, in my opinion, aligns with the understanding that, in a relatively stagnant industry, expansion through acquisitions may be a more effective means to make significant strides compared to relying solely on organic growth.

According to Atkore Management:

We believe that our business and demand for our products is influenced by two main economic indicators: United States gross domestic product, or “GDP,” and non-residential construction starts, measured in square footage. The United States non-residential construction market has experienced modest growth over the past few years, in line with United States GDP. (page 35. 10K – 2022)

Indeed, a modest 0.3% increase in non-residential construction for September, as reported by the US Commerce Department, may not be substantial enough to anticipate significant growth for Atkore. Economic indicators in the construction sector are crucial for companies like Atkore, and while any growth is positive, the marginal uptick suggests a relatively slow pace.

Competitors

The broader industry trend, with Atkore’s peers experiencing significant growth in share prices, except for Hubbell, suggests a substantial influx of investment in new construction within the market. The impressive performance of Atkore’s competitors, with more than a 20% increase in share prices, indicates a positive sentiment and robust activity in the construction sector. Analyzing the success of peers can provide valuable insights into market dynamics and may prompt further examination of Atkore’s strategies and positioning within this thriving environment.

It’s noteworthy that a closer examination of competitors’ Return on Invested Capital reveals Atkore’s effective capital utilization. However, it’s important to consider that Atkore is a relatively new company compared to many mature competitors in the industry. The efficiency in capital deployment signals a promising capability for Atkore, and as a newer player, it may have more agility and potential for growth compared to its more established counterparts.

Valuation

PE Valuation

The initial impression of Atkore being a steal based on the average PE ratio of its competitors might warrant a closer examination. Delving into the specifics of individual competitors provides a more nuanced understanding. For example, examining Eaton Corp reveals a focus on data centers and more secular industries, potentially influencing its valuation.

On the other hand, Encore Wire, which shares a closer size and business nature with Atkore, being valued at a similar PE, indicates that the market perceives comparable value in these companies.

DCF Valuation

I’ve chosen a 0% increase in Free Cash Flow for two key reasons. Primarily, according to David Johnson, CFO, net sales declined 15% year-over-year to $870 million, and our adjusted EPS decreased 24% to $4.21, as mentioned during the Q4 Earnings Call. This conservative outlook is further supported by the absence of improvement in the US construction sector over the last six months, as observed earlier. Taking into account these factors and applying a Weighted Average Cost of Capital of 10%, our calculated price is estimated at $183 per share.

However, it’s crucial to note that Atkore operates in an industry that goes through ups and downs. During tough times, there might be too much supply, which could force the company to sell products at a loss or make difficult decisions like laying off staff or closing factories. To be extra careful in our calculations, we choose to halve the expected cash flow. This accounts for potential problems during industry downturns, resulting in a revised price estimate of $91/share.

Considering this analysis, we perceive Atkore as overpriced at $130/share by 42%. This conclusion stems from our commitment to a conservative valuation strategy, considering the cyclical nature of the industry and potential future uncertainties.

Risks

The company’s performance is susceptible to general economic conditions and global economic activity, with potential adverse effects from factors such as economic recessions, and supply chain disruptions. The cyclical nature of the non-residential construction industry, a major component of the company’s business, exposes it to risks associated with downturns. Fluctuations in raw material prices, particularly steel, copper, and resin, have the potential to affect the company’s gross profit, and challenges may arise in passing these fluctuations onto customers. The company also faces the risks of intense competition, reliance on third-party freight carriers, and vulnerability to cyberattacks. Changes in the regulatory landscape and trade policies, both domestically and internationally, may impact demand for the company’s products. Collectively, these risks could materially and adversely affect the company’s business, financial position, results of operations, and cash flows.

Risk of Short Thesis

Shorting Atkore’s stock carries risks, given the company’s history of acquisitions, potential positive news or market sentiment shifts, and the possibility of a short squeeze. The risk of unexpected events, such as regulatory changes or industry disruptions, add complexity to short positions. Traders and investors should carefully assess market conditions, conduct thorough research, and implement risk management strategies, as shorting involves unlimited risk.

Conclusion

In summary, Atkore Inc. appears to be treading on shaky ground in the electrical raceway market. Although the company has a fairly diverse product line and client base, there are some considerations in its ownership structure, where institutions hold a significant stake and insiders are selling shares. The touted moat of efficient large-scale production reveals a drawback in the company’s struggle to expand globally due to soaring shipping costs. Economic indicators point to a sluggish industry growth, questioning Atkore’s ability to thrive in a lackluster environment.

The assessment of Atkore Inc.’s valuation, particularly through DCF analysis, presents a concerning outlook, indicating a potential overvaluation of the stock. The company is exposed to substantial risks, encompassing economic downturns, fluctuations in raw material prices, and intense competition, thereby clouding its financial stability. In essence, Atkore Inc. finds itself in a challenging position, contending with internal uncertainties and external obstacles that have the potential to trigger a significant downturn in both its business and financial prospects. Consequently, I would recommend a sell rating for prudent risk management.