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Patrick Industries, Inc.’s PATK shares have been riding high on the back of industry growth, acquisitions as well as solid geographic-expansion efforts. Consequently, the stock has rallied 19.3% in a year, outperforming the industry’s 17.7% upside.
Moreover, earnings estimates have risen over the past few weeks, suggesting that sentiments on Patrick are moving in the right direction. Over the past 60 days, the Zacks Consensus Estimate for 2018 earnings has been revised upward by 4.9%. Also, earnings estimates for 2019 have inched up 5.8% in the same time frame. This signifies bullish analysts’ sentiments.
We are optimistic about this Zacks Rank #1 (Strong Buy) company’s solid fundamentals and expectation of outperformance in the near term. You can see the complete list of today’s Zacks #1 Rank stocks here.
Patrick, a major manufacturer of component products, and distributor of building products and materials for the recreational vehicle (“RV”), manufactured housing and marine industries, displays strength in several key areas. Let’s delve deeper.
What Might Drive the Stock Higher
Solid Performance & Expansion Strategy: Patrick came up with better-than-expected results in the first quarter of 2018. The company’s top and bottom line each registered 60% year-over-year growth in the quarter, buoyed by continued execution and traction of strategic and operational initiatives, coupled with ongoing momentum in its primary markets.
Notably, the company’s revenues from the RV industry, representing 69% of first-quarter 2018 sales, grew 53% as industry wholesale unit shipments increased about 13% in the quarter. The company maintained organic growth level of more than double digit in the first quarter (in excess of 30%).
Meanwhile, the company follows strong inorganic strategies, via which it completed four acquisitions in the first quarter — Metal Moulding and Aluminum Metals in February 2018, and Indiana Marine Products and Collins & Company in March 2018. These four companies contributed approximately $13 million of revenues in the quarter.
Encouragingly, Patrick was able to expand gross margin (up 100 basis points year over year), leveraging fixed costs and realizing synergies amid modest input-cost headwinds. Again, the company’s current business model and recent acquisitions have helped the company generate robust operating cash flows, which will aid Patrick in supporting its strategic growth plans. In the first quarter, the company generated approximately $25 million of operating cash flows compared with a cash consumption of $11 million in the year-ago period.
Patrick has been optimistic about the momentum in all of its primary market sectors. Solid fundamentals and demographic trends will likely continue to drive retail demand in both its leisure for the lifestyle markets, and housing and industrial markets for the foreseeable future.
Earnings & Revenue Strength: Patrick is poised to benefit from both sustained momentum in the RV industry, and huge merger and acquisition space.
The company’s EPS is expected to grow 41.8% for the current year, higher than the industry’s average projected growth of 29.2%. In 2019, Patrick is expected to come up with a solid performance, wherein its bottom line is expected to grow 12.6%.
Meanwhile, the company’s sales are expected to increase 32.5% and 7.2% for the current and next year.
Valuation Looks Rational: Patrick has a Value Style Score of B, putting it in the top 40% of all the stocks we cover from this perspective. The company currently has a trailing 12-month P/E ratio of 16.7, below the industry’s average of 20.6x. This indicates that the stock is undervalued compared to peers. Also, the company has a forward P/E ratio of 13.5. It is appropriate to state that a slightly more value-oriented path may be ahead for the stock in the near term.
Looking at the company’s sales, the company trades at a price-to-sales (P/S) ratio of 0.8, lower than the industry’s average of 2.3. Some prefer this metric over other value-focused ones because sales are harder to manipulate with accounting tricks than earnings.
The company’s Value Score of B shows that the company is undervalued compared to industry peers. Thus, it is a good time to place a bet on the stock.
Superior ROE: Patrick’s return on equity (ROE) supports its growth potential. Its ROE of 25.3% compares favorably with the industry’s average of 12%, implying that it is efficient in using its shareholders’ funds.
Other Stocks to Consider
Other top-ranked stocks in the construction sector are Installed Building Products, Inc IBP, PGT, Inc PGTI and Simpson Manufacturing Co., Inc. SSD, each sporting a Zacks Rank #1.
Installed Building Products and PGT have a long-term earnings growth rate of 30% and 19.3%, respectively.
Simpson Manufacturing’s 2018 earnings are expected to increase 41.9%.
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