PGT, Inc PGTI
October 29, 2008 - 10:30am EST by
todd1123
2008 2009
Price: 2.00 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 73 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

As a follow-up to chaney943’s write-up on October 2006 (equity price 2-years ago was $14.50 - $15.00 / share), I am recommending a long equity position in PGT, Inc (“PGTI”) - currently trading at ~$2.00 / share - which I believe presents a compelling near-term risk / reward proposition, with total return potential of >200 - 250% (scenario / probability tree further below) over the next 6 – 18 months.  As you recall, PGTI manufacturers and distributes both impact-resistant and traditional windows with sales concentrated in Florida, but steadily moving up the East and Gulf coasts.  Today the company is over 10x the size of its nearest competitor and has over ~70% market share in the Florida market (and, notably, has expanded its reach into NC / SC / surrounding Gulf region).  More importantly, through recent / proprietary channel checks, we have re-confirmed that PGTI’s captive distribution network in FL / NC / SC / Gulf states is second to none.  While PGTI is currently facing significant housing headwinds, the equity security trades for >13% FCF yield on 2008E trough earnings (and closer to 40 - 60% FCF yield on normalized - which we have assumed "normalized" will be approx 50% of peak earnings power in 2006 - so relatively conservative) in a very defensive capital structure (note that PGTI amended their credit agreement a couple months back providing them w/ ample running room to weather a housing "Depression" if it comes) and with more-than-adequate liquidity (>$47MM of cash and revolver availability). 

 

While PGTI is currently facing significant housing headwinds in FL / NC / SC / Gulf States, there are four primary reasons why I think an investment in PGTI is timely / actionable including: (i) equity is currently trading at less than 45% of book value (and less than 85% of "PF book value" – which ascribes 0 value to goodwill), (ii) recent equity capital raise (done at $4.20 / share completed in Aug / Sep) helped deleverage the capital structure by >$30MM (which should result in net leverage being less than 2.9x as of LTM June 2008), (iii) at the time of the recent capital raise, management negotiated an amended credit agreement by which they have ample opportunity to manage through the duration of the housing cycle and (iv) a housing stimulus policy is very likely to be passed in q1 - q2 2009 which would provide a meaningful catalyst to stabilizing housing (at the very least, perception around housing) and triggering improvements longer term (please reference the 3-page housing stimulus proposal that is being circulated amongst homebuilders / DC legislators / economists – using 73 – 75 housing stimulus package as a proxy).  Interestingly, as we compare 2007 to 2008E performance, its worth noting that the 2H 08E – 1H 09E could very likely surprise to the upside driven by the benefit of storm activity (PGTI’s impact-resistant windows is a direct beneficiary of FL / NC / SC / Gulf states adoption of tighter codes). 

 

PGTI currently trades at ~6.7x trough 08E EBITDA ($21.6MM of EBITDA per our downside calculation – any storm activity benefit should provide a significant margin of safety to this number), ~8.2x 08E FCF proxy (EBITDA – Capex).  Based on normalized earnings power (2 – 3 years out), PGTI trades for less than 3.6x EBITDA / less than 4.5x FCF.  While PGTI’s earnings have suffered over the past 12 - 24 months largely driven by housing weakness in Florida, management has done the right things to re-balance the cost structure and has significant new business through additional storm-activity of late (note that 2007 saw almost 0 benefit on this front) and recent commercial wins.  In addition, recent raw material easing in both PVC resin (spot pricing down -35% to -40% in the past 2 months) and aluminum (PGTI’s two biggest inputs) should provide a meaningful catalyst to improved margins over the next 2 – 3 quarters.  Overall, PGTI equity trades as if there is a near-term liquidity crunch pending

 

Ultimately, an investment in PGTI is a 2/3-year cycle bet on the underlying demand drivers for housing, especially given the amended capital structure and ample liquidity (>$47.3MM) which should allow the Company to weather the near-term headwinds facing the industry.  Given the Company’s solid liquidity profile, best-in-class operations / management and FCF profile (PGTI should generate >$9.5MM in FCF in 08E – 13% FCF yield on PF mkt cap on trough earnings power), we believe PGTI will ultimately weather the housing cycle and get a premium multiple from a separate strategic partner.

 

In the near-term, PGTI reports Q3 results on October 31st (Friday) and management will likely provide additional color around (i) recent business wins driven by storm activity, (ii) future / large-scale project wins, (iii) clarity around the net margin benefit (given raw material pricing has come off significantly in recent months).  While I don’t expect a rosy forecast on the future, I think anything less-than-foreboding

 

BUSINESS OVERVIEW:

Please reference chaney943’s write-up from October 2006.  Most of the facts are still very consistent w/ today but, importantly, Florida is two-years further along in their housing recession.

 

CAPITAL STRUCTURE:

 

 

 

 

 

 

 

 

Downside

 

 

 

 

 

 

2006

2007

2008E

NORM

 

 

 

 

 

 

 

 

 

PF EBITDA

 

 

 

 

$71.6

$31.7

$21.6

$40.0

EBITDA (% of 06 Peak)

 

 

 

 

100%

44%

30%

56%

 

 

 

 

 

 

 

 

 

 

Pre-Cap

PF Cap

Post-

 

 

 

 

 

 

Raise

Raise

Cap Raise

 

 

 

 

 

Cash

17.3

 

17.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Debt

0.1

 

0.1

 

 

 

 

 

L-Term Debt(1)

120.3

30.6

89.7

 

 

 

 

 

Total Debt

120.4

 

89.8

 

1.25x

2.83x

4.17x

2.25x

 

 

 

 

 

 

 

 

 

Total Net Debt

103.1

 

72.5

 

1.01x

2.29x

3.37x

1.81x

 

 

 

 

 

 

 

 

 

Shares

28.5

7.8

36.3

 

 

 

 

 

Price(2)

$4.20

 

$2.00

 

 

 

 

 

Mkt Cap

119.7

 

72.5

 

1.01x

2.29x

3.37x

1.81x

 

 

 

 

 

 

 

 

 

TEV

222.8

 

145.0

 

2.03x

4.58x

6.73x

3.63x

 

 

 

 

 

 

 

 

 

(1) Assumes $2MM for friction costs / banker fees.  Clarity should come on Friday post-Q3 filing

 

(2) Price / share at cap raise was $4.20 / share versus current price / share of $2.00

 

 

 

 

BOOK VALUE ANALYSIS:

 

Methodology #1

 

 

PF Book ($MM)

$164.4

 

PF Shares Out

36.3

 

PF Book / Share

$4.53

 

% of Book

44.1%

 

 

 

 

Methodology #2 (ascribe 0 value to goodwill)

PF Book ($MM)

$86.7

 

PF Shares Out

36.3

 

PF Book / Share

$2.39

 

% of Book

83.6%

 

 

TARGET PRICE / UPSIDE vs DOWNSIDE

 

PGTI currently trades at ~6.7xx 2008E EBITDA (versus blding products peers in the 8 – 10x range).  We ultimately think PGTI should trade at an approx 10% FCF yield on normalized EBITDA of $40MM ($34MM of unlevered FCF or approx $$0.90 - 1.00 / share), implying a share price of approx $9 - $10 / share over the next 6 – 18 months. 

 

UPSIDE CASE: Assume ~10% normalized FCF yield on $0.90 – 1.00 of unlevered FCF / share, implies a share price of approx $9 - $10 / share (>375% upside)

BASE CASE: Assume ~15% normalized FCF yield on $0.90 - $1.00 of unlevered FCF / share, implies a share price of $6.00 - $6.50 / share (200 – 250% upside)

DOWNSIDE CASE: Assume Company puts itself up for sale and gets half credit for goodwill given accretive acquisitions / franchise value of captive distribution base, implies book value / share of $3.50 / share (70% - 75% upside)

 

RISKS:

-          Housing Cycle longer / deeper: US Depression and we’re in early stages of a deflationary bust

 

CATALYSTS:

-          Near-Term (3 – 6 mths): Q3 earnings release on October 31st

-          Near-Term (3 – 6 mths): Margin improvement given raw material easing

-          Medium-Term (6 mths): Housing stimulus to be passed in Q1 09E period

-          Longer-Term (6 – 12 mths): Strategic interest in 09E given PGTI franchise value (likely from Jeld-Wen, Pella, Anderson ,Masco, PLYGEM, Associated Materials, etc)

-          Longer-Term (6 – 12 mths): L-term value recognition given PGTI’s captive distribution network in FL / NC / SC and Gulf States

 

 

Catalyst

- Near-Term (3 – 6 mths): Q3 earnings release on October 31st

- Near-Term (3 – 6 mths): Margin improvement given raw material easing

- Medium-Term (6 mths): Housing stimulus to be passed in Q1 09E period

- Longer-Term (6 – 12 mths): Strategic interest in 09E given PGTI franchise value (likely from Jeld-Wen, Pella, Anderson ,Masco, PLYGEM, Associated Materials, etc)

- Longer-Term (6 – 12 mths): L-term value recognition given PGTI’s captive distribution network in FL / NC / SC and Gulf States
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