Atkore Stock: Stabilization Looks Like It’s Coming (NYSE:ATKR)

In June, I thought the shares of Atkore (NYSE: ATKR) they were electrifying, after the stocks had fallen a lot. While it was clear that topline earnings were down, we thought that “normal” earnings strength had started to support the valuation, which, along with a balanced capital allocation model, has begun to reveal its emerging appeal.

This led to the initiation of a first position at the time, far too soon, with the benefit of a few months of hindsight. Since June, the stock has lost another third of its value in the span of just a quarter, with shares now trading in the mid-$80s. Given that the company is tracking flat results from Q4, I’m willing to double down here.

Feeding and protecting the world

Atkore manufactures electrical, safety and infrastructure solutions. Examples of products and applications include electrical conduits and fittings, cable and cable management trays, PVC products, infrastructure products as well as safety and security products.

Electricity and related sales account for the vast majority of sales (including associated service functions), with safety and infrastructure accounting for the remainder of sales.

The company generated nearly $2 billion in sales in the years before the pandemic. Flattish’s reported sales for several years have misrepresented business performance, with operating margins rising from the low single digits to the low double digits.

A Boom & Bust

In the post-pandemic era, stocks, but certainly businesses, have caught fire. Revenue doubled to $3.9 billion in 2022 as operating margins exploded to 30% of sales, followed by a period of stagnation and normalization that continues to this day.

That boom pushed the stock from $40 in 2019 to $150 in 2023 and even a high of $195 in March of this year, even as peak earnings were already falling.

In November 2023, the company reported a 10% decline in full-year sales to $3.52 billion, with price declines more than offsetting an increase in volumes. The composition of the sales mix led to a nearly 30% decline in operating earnings to $893 million, still translating into nice margins equal to 25% of sales, with reported earnings of $17 per share and change .

Net debt of $374 million was modest, with EBITDA (still high) crossing the billion mark. Somewhat comfortingly, and the reason the stock hit all-time highs in March, was that the company expected to maintain that performance into 2024. The company initially guided for sales to be largely flat between $3.50 billion and $3.65 billion , with EBITDA between $900. -$950 million, enough to earn about $16-17 per share on the bottom line.

After posting a 4% drop in first-quarter sales in February, second-quarter sales fell 11% as reported in May. While prices were still weak, volumes also turned unexpectedly negative after further double-digit percentage increases in the first quarter. The weaker quarter triggered a $50 million cut in full-year EBITDA guidance, now seen between $850 million and $900 million.

Trading at 8 times earnings at $135 per share in June, it was clear that earnings were not sustainable as the market sees them. Assuming that margins could decline to historical numbers around 10% and sales could fall to $3 billion, we pegged the net earnings potential at about $200 million, equal to $5.50 per share.

If this adverse scenario were to occur, the stock would be trading at a multiple of twenty times earnings, as I’d also expect the company to continue to post excess earnings in the meantime.

The direction of travel for earnings was clear, with peers also suffering from softer conditions and Atkore citing weakness in HDPE and solar in particular. However, it was a low current earnings multiple, but in addition, fundamental support in sight based on normal earnings, which led me to initiate a small position.

dip

In July, the company announced an unexpected CFO transition after David Johnson resigned during these difficult times. In August, third-quarter sales were down 10% to $822 million, all due to lower prices with essentially flat volumes.

The company attributed the declines to continued price weakness and subdued demand from the construction sector over the summer. The company believes this trend will continue through the fourth quarter and frankly into fiscal 2025. Quarterly operating margins were 20% and sales change, down five points from the prior year. Overall, net income fell about 39% to $123 million, with GAAP earnings per share of $3.33 per share (with adjusted earnings coming in at $3.80 per share). Overall, earnings are trending now at $13-$15 per share.

Net debt rose to $460 million, with trailing EBITDA now reported at $863 million, which translates to low leverage ratios of just over 0.5x. The company subsequently cut full-year guidance quite a bit, with weakness set to continue in the coming months and quarters. Full-year EBITDA is now seen at a midpoint of $777 million for the year, with earnings around $14.41 per share.

With reported EBITDA of $631 million so far this year, this implies that fourth quarter EBITDA is approximately $146 million. This compares to a number of $206 million in the third quarter, suggesting that fourth quarter GAAP earnings may be trending closer to $2 per share!

what now

The third quarter, but in addition guidance for continued softness in the fourth quarter, is attributed to a softer and softer macro environment in the HDPE markets in particular. In addition, investors were dealt another blow as the company (and some peers) were hit with an antitrust lawsuit, accused of conspiring to overcharge customers.

This was linked to the post-pandemic period, when the company clearly won, as these premium prices invited (Mexican) peers to make inroads into the market as well. This was expressly acknowledged on the third quarter conference call, with the amount of pipelines being transported from Mexico to the US far exceeding negotiated limits, which caught the attention of the industry.

Given an earnings trend of $5.50 per share in such a downside (post-normalization) scenario, based on a revenue base of $3 billion and operating margins of 10%, fundamental earnings support is about 15 times the gain. The return to this earnings number appears to be happening faster than I had earlier expected, as it raises the question of whether margins could fall further. However, we are clearly at levels where real fundamental support is coming in, with shares down more than 50% from their highs.

Moreover, this is because the security and infrastructure side of the business is growing, accounting for a quarter of sales in the third quarter, after sales were up very modestly in the third quarter. This will provide relatively greater stability and diversification in the future.

Overall, while there is very little green shoots in the third quarter earnings report (if any) and recent trends, we’re averaging down to $100 per share here. This mainly has to do with the comments made for fiscal 2025. Given current events, the company sees EBITDA around $650 million in fiscal 2025 as kind of the bottom line here.

While that’s down from an annualized $825 million based on third-quarter results, the $175 million shortfall equates to just $3-4 per share. Put another way, the company strongly believes that earnings power is around $10 per share in 2025 as a low going forward. This makes me happy to average here, although this could be a rocky road ahead, luckily I’m facing still modest leverage here.