Author Topic: PATK - Patrick Industries  (Read 5069 times)


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Re: PATK - Patrick Industries
« Reply #10 on: September 01, 2019, 11:40:45 PM »
The WSJ recently had a piece on the RV industry and potential leading headwinds.
In terms of per share perceived value, shares were trading at 64 at the last post, went down to about 28 during the December scare, went back up to 55 in April and, according to the risk assessment by the company, now trade around 35 due to many reasons including the noise around tariffs.
If investing is easy, if credit availability or liquidity are not significant concerns, if one agrees that this is mostly about inventory rebalancing and weather issues, this is a company to buy at present levels because of its historical operational record, its amazing stock performance up to late 2018 and great promises related to expected growth in the leisure and lifestyle market. I agree with the above, in terms of patient and long term thinking and reasonable return expectations, but will wait for a better opportunity because of the analysis of the company, taking into account relevant industry dynamics and general trends that make it necessary, IMO, to adjust to normalized earnings.

PATK entered the 2007 period with 37% of revenues to manufactured housing and 35% of revenues to recreational vehicles and a sales to debt ratio of 5.3 and an inventory to sales ratio of 0.10. With the cyclical downturn affecting all their segments, once stuck between a rock and a hard place, they did very well operationally (cutting costs, downsizing, working capital management) and financially (asset sale {they were owning facilities then vs leasing}, raising opportunistic debt and some equity). Sales went from 435.2M in 2007 to 212.5M in 2009 and share went from 18.30 to 0.25 in late 2018 and traded in the 0.01 to 0.80 range in Q1 2019. So, they survived.

After, they entered a growth phase, organic to some degree but mostly due to acquisitions. From 2010 to now, they have completed 42 acquisitions (57 companies). This resulted in very significant top-line growth and some improvement in the net profit margin (2013: 4.0%, 2018: 5.3%). The expansion has been concentrated in the RV manufacturing segment, up to 69% of sales in 2017 and more recently, the marine segment has become mor important (18% of sales Q2 2019). To fund the acquisitions, they have used internally generated cashflows and debt (a lot of debt).

Acquisition multiple: Reported annualized revenue of acquired over price paid by acquirer
-2012: 2.7    2013: 2.5    2014: 1.8    2015: 1.7    2016: 1.2    2017: 1.2    2018:1.7
The numbers dealing with the component of goodwill and intangibles to price paid tell the same story. IMO, they increasingly paid more for their acquisitions and it is possible that more recent acquisitions were made in a late-cycle period when more restraint should have been applied. For example, they reported, in 2018, annualized revenues from the 2018 acquisitions of 568M. Assuming no organic growth, one would have expected additional revenues of 142M per quarter in 2019. Actual revenue increase in Q1 2019: 64.7M, in Q2 2019: 8.3M.

They are navigating this leg of the cycle (numbers end 2018) with a sales to debt ratio of 3.6 and an inventory to sales ratio of 0.12. In the last two years, they have produced high cash flow levels but IMO, those cashflows should be normalized for the cycle and, even if interest rates remain overall low, the spread for their debt may increase significantly. In 2018, they issued a 5-year convertible bond yielding 1% (1% coupon but the bond was issued at a discount) with a conversion feature at 2.5x today's price level. They have a mountain of debt maturities due in 2022.

Interestingly, in 2017, they issued 2.025M shares reflecting a net price of 48.67 per share in order to continue their expansion while maximizing their capital structure and, in 2018, they bought back 1.984M shares at an avg price of 54.21.

What's the point? PATK is involved in cyclical industries and there is a credit cycle going on.

Their biggest exposure is the RV industry. Similar dynamics are at play in the marine segment and also, to some degree, in their other manufacturing and distribution segments.
From anecdotal, scuttlebutt, historical, common sense and industry review, RVs and boats are extremely discretionary expenses. Most RVs are financed. I come to the conclusion that there is significant over-capacity and built-in inverse pent up demand. I find that PATK may be hit by a triple whammy as they 1-levered their balance to a very significant degree, in an industry where 2-customers used significant leverage to buy highly discretionary items and 3-in an environment where capital is felt to be abundant, cheap and permanent. In 2018, RV shipments were down 4.1%. 2019 appears to be a moving target with a present 'forecast' at -17.1%.

There are many ways to slice this. I will not short this individual name and, in fact, think that it will survive. I find that the way to discount and weigh the possibilities and different scenarios also involve looking at overall trends.
I may be wrong but suggest that the share price could come lower, much lower.

« Last Edit: September 01, 2019, 11:43:10 PM by Cigarbutt »