Simpson: Fasteners for Wood and Masonry

11/10/2020 5:00 am EST

Focus: INDUSTRIALS

Douglas Gerlach

President, ICLUBcentral, Inc.

Simpson Manufacturing Co. (SSD) designs, manufactures, and sells wood and concrete building products for residential and commercial construction markets in 50 global locations, notes Doug Gerlach, editor of SmallCap Informer.

Its more than 10,000 wood construction products include connectors, truss plates, fastening systems, fasteners, shearwalls, and pre-fabricated lateral systems that are used in light-frame construction.

It's 1,000 concrete products include adhesives and mechanical anchors and repair products for use in concrete, masonry, and steel construction.

Since 2010, Simpson Manufacturing has seen sales grow a consistent average 8.3% a year. EPS have grown 15.2% during the same timeframe, buoyed by margin expansion and share repurchases. In the third quarter ended September 30, 2020, the company saw EPS grow 58.8% year-over-year on a 17.5% increase in sales.

The company's growth strategy includes expanding its European business, focusing on higher-margin concrete products, and maintaining a competitive edge with its truss software engineering solution.

Recent trends towards increasing home renovations have benefited the company. As homeowners have been spending more time at home, the home improvement business has been spurred forward.

By positioning products in adjacent markets, its exposure to the cyclical U.S. housing market has been mitigated over time, especially in recent years. Still, when the current housing boom ends, we would expect some pullback as home starts slow.

For now, the near-term and long-term provide ample rationale for investing. Management’s outlook for the full fiscal year ending December 31, 2020 is for sales of 9.0% to 10.0%. We project sales will grow annually around 8.0% and EPS annually around 9.0% through 2024.

Simpson Manufacturing’s operating income margin has regularly outperformed its peer average, and never slid into negative territory at the bottom of the housing crisis as most other peers did.

Pre-tax profit margins have been relatively stable in the last five years, averaging 15.3%, much better than the industry average of 8.0%. Return on equity has been trending upwards, ending 2019 at 14.7%, above the average of S&P 500 companies. The company has negligible debt and a strong cash position.

The stock is currently selling at $88 and a P/E ratio of 20.9, just below our revised average P/E ratio of 22.6. We think the stock can sell for a P/E ratio of 27.8, which would take the price as high as $180.

On the downside, a P/E ratio of 17.4 times TTM EPS equals a low price of 73. The current price represents a 6.2-to-1 upside/ downside ratio, with the chance of an 16.7% annual total return.

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