Garage doors

PGT Innovations: Buy It And Sell Calls for a potential annualized return of 27.8% (NYSE: PGTI)

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Investment thesis

PGT Innovations (New York stock market : ITMP) will grow through its high-quality products and continued acquisitions, as well as organic growth. PGTI can provide excellent covered call premium and dividend yield even if the stock is not moving much.

PGT Innovations

PGT Innovations manufactures and supplies premium windows and doors. Its highly engineered and technically advanced products can withstand some of the harshest weather conditions on Earth and are revolutionizing the way people live by unifying indoor and outdoor living spaces. They are the largest manufacturer of impact resistant windows and doors in the country and hold a leading position in its core market.

The Company distributes products through multiple channels, including window distributors, building material distributors, window replacement dealers and fencing contractors. Products are sold through authorized resellers and distributor networks in the Caribbean, Florida, Canada, and South and Central America, but most of its revenue is generated in Florida.

The PGT Innovations family of brands includes CGI®, PGT® Custom Windows and Doors, WinDoor®, Western Window Systems, Anlin Windows & Doors, Eze-Breeze®, NewSouth Window Solutions and a 75% interest in Eco Window Systems. In their respective markets, the company’s brands are the preferred choice of architects, builders and owners. Their high-quality products are available in custom and standard sizes with massive dimensions that allow for limitless design possibilities in residential, multi-family and commercial projects.

Please go here if you want to watch a four minute video on PGTI. PGTI has annual sales of $1.4 billion with 5,300 employees. They are 95.1% held by institutions, with 4.3% short interest. Their return on equity is 16.7% and they have a return on invested capital of 9.7%. The free cash flow yield per share is 13.7% and their redemption yield per share is 0.2%. The course to pound ratio is 2. Their Piotroski F score is seven, indicating strength.

PGTI Acquisition of Martin

PGTI completed its acquisition of Martin for $185 million on October 14, 2022, allowing PGTI to expand into the garage door market. PGTI’s revenue potential from the acquisition is approximately $60 million with EBITDA margins above 30%. There are cost synergies and cross-selling opportunities between the two companies.

Presentation of Q3 results

www.pgtinnovations.com/

Solid balance sheet and acquisitions

PGTI has $219 million in cash and cash equivalents. They show an adjusted EBITDA leverage ratio of 1.6 by banking covenant. I show a net debt to EBITDA ratio of 2.2.

Presentation of Q3 results

www.pgtinnovations.com/

Presentation of Q3 results

www.pgtinnovations.com/

Third Quarter Results and Full Year Outlook

Q3 of PGTI Press release showed strong results. Earnings and net sales beat analyst estimates and rose year-over-year.

“PGT Innovations had a strong third quarter. Net sales increased 28% to $386 million, year-over-year, despite the impact of Hurricane Ian, which made landfall on September 28 near our headquarters in Venice, Florida,” said Jeff Jackson, President and CEO. “Although our facilities were not damaged, the storm-related disruptions resulted in the deferral of approximately $12 million in third quarter sales.”

  • Net sales in the third quarter totaled $386 million, an increase of 28% (including organic growth of 17%).
  • Net profit in the third quarter was $30 million, compared to a net loss of $5 million.
  • Adjusted net income* for the third quarter was $33 million, an increase of 111%.
  • Adjusted EBITDA* in the third quarter was $68 million, an increase of 58%.
  • Net earnings attributable to common shareholders per diluted share in the third quarter were $0.50, compared to a net loss of $0.11.
  • Adjusted net earnings per diluted share* for the third quarter was $0.55, compared to $0.26.
  • Cash at the end of the third quarter was $219 million, an increase of 128%. Updated guidance for fiscal year 2022
  • 2022 net sales range from $1.460 billion to $1.490 billion.
  • 2022 adjusted EBITDA* between $245 and $255 million.

The stock price fell 12.5% ​​from $22.74 on Nov. 10 before the third-quarter earnings announcement to $19.89 on Nov. 14. This is a market overreaction in my view and may be due to the following statement from their third quarter earnings report.

“Our guidance for the prior fiscal year 2022 did not consider the impacts of Hurricane Ian, the previously disclosed cybersecurity incident, or our acquisition of Martin Door. Our facilities did not experience storm damage, but our employees could not get to work safely, limiting our ability to produce in October.In addition, the cybersecurity incident we experienced on November 5 impacted our ability to process orders and As such, we are updating guidance for fiscal 2022 for net sales of between $1.460 billion and $1.490 billion and adjusted EBITDA in the range of $245 to $255 million,” Kunz concluded.

Q3 press release

www.pgtinnovations.com/

The revised outlook for the full year is not significantly different from the previous forecast.

Good technical entry point

PGTI’s stock price closed at $19.89 on November 14. I added the green Fibonacci lines, using PGTI highs and lows over the past five years. It is interesting to note how the market stops or bounces on these Fibonacci lines. They can be a clue as to the direction the stock price may be heading. PGTI is at the 61.8% Fibonacci retracement level but could go lower. However, I believe that PGTI will trade above $20.00 by May for the reasons of this article.

Authors screen

Schwab Street Smart Edge

The two most accurate analysts have a one-year average price target of $28.00, indicating upside potential of 40% from the November 14 closing price of $19.89 if correct. Analysts are just one of my indicators, and they’re not perfect, but they’re generally within the range of estimates. They often seem a little bullish, so I suspect prices could end up falling below their one-year targets to be on the safe side.

Trend of earnings per share, P/E ratio and net margin

The black line shows PGTI’s share price over the past seventeen years. Look at the number chart below the chart to see PGTI’s EPS. Earnings were $0.75 in 2019, $0.77 in 2020, and $0.45 in 2021, and they are expected to earn $1.95 in 2022 and $2.19 in 2023.

The P/E ratio for PGTI is currently at 11, but the average ratio over the last ten years is 23. I don’t think the P/E will go back up to 23 anytime soon. If PGTI gains $2.19 in 2023, the stock could trade at $21.90 even if the market only assigns a P/E ratio of 10.

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FastGraphs.com

PGTI’s net margins over the past ten years show they have rebounded from their covid lows and are now close to 8%.

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StockRover.com

Sales, earnings per share and share price have appreciated since 2013.

Authors screen

StockRover.com

Sell ​​Covered Calls

My answer to the uncertainty is to sell covered calls on PGTI in six months. PGTI closed at $19.89 on Nov. 14, and May’s $20.00 covered calls are at or near $2.70. A covered call requires the purchase of 100 shares. The stock will be canceled if it trades above $20.00 on May 19. It can even be canceled earlier if the price exceeds $20.00, but that’s okay since the capital is paid back sooner.

The investor can earn $270 from the call premium and $11 from stock price appreciation. This totals $281 in estimated profit on an investment of $1,989, or an annualized return of 27.8% since the period is 185 days.

If the stock is below $20.00 on May 19, investors will still make a profit on that trade up to the net stock price of $17.19. Writing covered call options reduces your risk.

Carry

I expect PGTI shares to appreciate as demand for their new and existing products remains strong. New housing starts are expected to decline by 20% in 2023, but demand for new doors and windows from PGTI will continue to be strong. Even if PGTI’s stock price only drops from $19.89 to $20.00 by May 19, a potential annualized return of 27.8% is possible, including a covered call premium .