Challenges From Imported Steel And Market Softness Offset By Decisive Share Buybacks And Growth In Solar Sector

Key Takeaways

• The increasing import of steel conduit from Mexico and sector softness are impacting Atkore's market competitiveness and demand for its products.
  
• Atkore's broad product portfolio and capital deployment strategy through share buybacks reflect a focus on growth and shareholder return, despite market challenges.
  
• Atkore faces revenue and margin pressures from imported steel conduit overages, market softness in telecom/utility sectors, and challenging pricing dynamics in PVC and steel products.

Catalysts

Engages in the manufacture and sale of electrical, mechanical, safety, and infrastructure products and solutions in the United States and internationally.

• The increasing import of steel conduit from Mexico is significantly impacting the domestic market, likely contributing to a decrease in volume and price competitiveness, which could affect revenue and net margins.
  
• The softness in the telecom and utility markets is expected to continue, which may result in lower demand for Atkore's products in these sectors, impacting both volume growth and revenue.
  
• The broad product portfolio, especially with growth in solar and data center sectors, positions Atkore to capture market trends and demand, potentially leading to increased revenue and net margins in the future.
  
• The company’s capital deployment strategy, specifically the repurchase of $125 million in shares and the new $500 million buyback program, indicates a focus on returning capital to shareholders and confidence in the intrinsic value of Atkore shares, which could support earnings per share growth.
  
• Challenges such as soft market conditions and pricing pressures are expected but countered by long-term opportunities and operational improvements, which could improve adjusted EBITDA and EPS metrics over time, indicating potential undervaluation.

Assumptions

• Analysts are assuming Atkore's revenue will decrease by -2.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 16.2% today to 10.4% in 3 years time.
• Analysts expect earnings to reach $318.1 million (and earnings per share of $10.58) by about October 2027, down from $533.2 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.4x on those 2027 earnings, up from 5.8x today. This future PE is lower than the current PE for the US Electrical industry at 19.0x.
• Analysts expect the number of shares outstanding to decline by 5.71% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.65%, as per the Simply Wall St company report.

Risks

• The increasing amount of imported steel conduit, primarily from Mexico, exceeds negotiated limits and is impacting volume, contributing to pricing pressures for domestic manufacturers of steel conduit, which could adversely affect revenue and margins.
  
• Softness in the telecom and utility markets, as noted, could lead to lower demand for Atkore's products in these sectors, impacting revenue growth.
  
• Reported broad pricing softness across most of the Electrical business, including a notable downturn in PVC conduit business due to slower end markets, could lead to reduced net sales and profitability.
  
• The company's reference to a potential continuation or acceleration of challenging pricing dynamics in PVC and steel conduit, due to import issues and overall market softness, suggests risk to future earnings and net margins.
  
• Atkore's mention of adjusted EBITDA and adjusted diluted EPS both being off by 4% from projections in the third quarter reflects operational vulnerabilities to market conditions that could persist or worsen, impacting earnings.

Valuation

• The analysts have a consensus price target of $122.5 for Atkore based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $140.0, and the most bearish reporting a price target of just $99.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $3.0 billion, earnings will come to $318.1 million, and it would be trading on a PE ratio of 14.4x, assuming you use a discount rate of 7.6%.
• Given the current share price of $86.8, the analyst's price target of $122.5 is 29.1% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.