Patrick Industries, Inc. PATK has been riding high on improving housing market prospects, accretive acquisitions and solid geographic-expansion efforts. The company’s shares have gained 67.5% in the past three months compared with the industry’s 22% rally. The outperformance can be attributed to its impressive surprise history, having surpassed the Zacks Consensus Estimates in 12 of the trailing 13 quarters.
Earnings estimates for 2020 have risen 10.7% over the past month, reflecting growing optimism of analysts on the company’s bottom-line prospects. Also, earnings estimates for 2021 have inched up 2.3% in the same time frame.
Here are a few factors that are driving growth of this Zacks Rank #1 (Strong Buy) company, which shares space with Masco Corporation MAS TopBuild Corp. BLD and Advanced Drainage Systems, Inc. WMS in the same industry. You can see the complete list of today’s Zacks #1 Rank stocks here.
Strengthening Housing Industry: The U.S. housing industry has started gaining strength in the past few weeks. The upside is primarily backed by gradual reopening of the economy as the pandemic-led restrictions have started easing. The recent encouraging market data — indicating prospects for the near term — are encouraging, given lower mortgage rates and reduced coronavirus-induced restrictions.
Per Lawrence Yun, chief economist of the National Association of Realtors, low mortgage rates will boost residential construction in second-half 2020 as families look for new homes after being cooped up during the lockdown stretch. (Read more: 5 Winning Construction Stocks to Buy for 2H20)
Although uncertain unemployment rate and tight credit standards may negatively impact demand for both manufactured housing and residential housing in the short term, fundamental housing demand remains strong, especially for affordable homes.
Expansion Through Acquisitions: Since 2010, Patrick has acquired 70 companies in core markets. Particularly in first-quarter 2020, it added two companies to its portfolio, Maple City Woodworking Corporation — a Goshen, IN-based manufacturer of hardwood cabinet doors and fascia for the recreational vehicle market — and a Cromwell, IN-based manufacturer of towers, T-Tops, hardtops, rails, gates and other aluminum exterior products for the marine market, namely SEI Manufacturing, Inc. These two tuck-in acquisitions are an excellent fit for its existing products and will continue providing long-term strategic value, bringing high-quality innovative product lines to its portfolio. Notably, these buyouts were added to the Manufacturing segment.
The company came up with better-than-expected results for first-quarter 2020 despite challenging market conditions. The results reflected the positive traction experienced across its end markets in the first two months of 2020, followed by business disruptions due to the COVID-19 pandemic. Diversification of the company’s end markets and geographic regions in which it operates have helped to lessen the impact of COVID-19, as certain plants in various parts of the country remained operational throughout March.
Solid Returns, Cheaper Than Industry: Patrick is a great pick for investors as it is cheaper than the industry. The trailing 12-month price-to-earnings multiple for the company is 14.71, cheaper than the industry’s 15.72.
Also, Patrick’s return on equity (ROE) is indicative of growth potential. Its ROE of 18.6% compares favorably with the industry average of 11.8%, implying that it is efficient in using shareholders’ funds.
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Advanced Drainage Systems, Inc. (WMS) : Free Stock Analysis Report
Masco Corporation (MAS) : Free Stock Analysis Report
TopBuild Corp. (BLD) : Free Stock Analysis Report
Patrick Industries, Inc. (PATK) : Free Stock Analysis Report
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