It’s time to discuss one of the smaller companies on my radar: Atkore Inc. (NYSE:ATKR), a company I started covering on August 27, 2023, when I went with the title “Atkore: A Top-Tier Industrial Mid-Cap Play.”
Back then, I introduced a fascinating mid-cap play with significant exposure in a wide range of non-residential, residential, construction, and industrial markets.
While Atkore’s roots go back to the 1950s, Atkore Inc. was established as a Delaware company in 2010. It’s the parent company of Atkore International Holdings and Atkore International.
Atkore Inc.
[…] Atkore operates in two core segments:
Electrical products for the construction of electrical power systems
Safety and Infrastructure products for critical infrastructure protection
Roughly half a year later, I’m revisiting the stock. Not only did the company just report its 1Q24 earnings, but it also initiated a dividend, which could mark the birth of a highly successful dividend growth stock.
Although I made the case in my prior article that I won’t be a buyer of ATKR due to my investment in Carlisle Companies (CSL), I’m changing my mind.
If I can get ATKR on a potential correction, I’ll happily make it a part of my dividend (growth) portfolio.
Now, let’s dive into the details!
Economic Headwinds
Let’s start with the bad news. Atkore is not immune to economic headwinds, as net sales for the first quarter of 2024 reached $798 million, which is a 4% year-over-year decline.
Adjusted EBITDA declined by 19%. Net income contraction was slightly worse at negative 20%.
Atkore Inc.
With that said, organic volume growth was a standout number, surging by an impressive 13% across all key product areas.
Despite this commendable performance, the gains were partially offset by the ongoing pricing normalization, in line with the company’s previously communicated trends.
Notably, the volume expansion was most prominent in the classic pipe and conduit category, recording high-single-digit growth, primarily driven by robust demand for PVC products.
Atkore Inc.
Segment-wise, both the Electrical and S&I segments showed positive volume growth.
However, the Electrical segment experienced margin compression, attributed to the mentioned pricing normalization, which, nonetheless, remained strong at 34%.
On the S&I side, there was year-over-year margin compression due to cost comparisons against the prior year and planned start-up costs in Indiana aimed at supporting volume ramp-up.
Atkore Inc.
Before I elaborate on the expected ramp-up in volumes, it’s important to note that the company maintains a strong balance sheet.
The company has no debt maturities until the 2028 fiscal year and used close to $100 million in 1Q24 to buy back stock.
Over the past three years alone, the company has bought back a fifth of its shares!
In general, the company maintains a very healthy balance sheet, as it has just $763 million in gross debt. Adjusted for cash and cash equivalents, it has $382 million in net debt, which is just 0.4x 2024E EBITDA.
Speaking of this year’s expected EBITDA, the company is upbeat about its future, which includes the introduction of a dividend.
A Dividend With Tremendous Growth Potential
Thanks to strong free cash flow and a healthy balance sheet, ATKR introduced a dividend.
The first dividend will be $0.32 per share, which will be paid to shareholders of record on February 27, 2024.
This dividend translates to a yield of 0.9%.
Atkore Inc.
At this point, you’re probably thinking something like, “So what, 0.9% won’t make a big difference!”.
Sure, a 0.9% yield means you get $90 in dividends from a $10,000 investment. That is not a lot.
However, this is just the start.
Not only does this signal that the company has a lot of confidence in its future, but we also need to be aware that there’s a lot of room for the company to grow its dividend.
If the company is expected to generate between $16.50 and $17.50 in annual EPS, it would indicate a payout ratio of just 8% using the $17 EPS guidance midpoint.
That’s one of the lowest payout ratios in the entire industrial sector, not just its industry.
If the company were to maintain a 40% EPS payout ratio, it could yield 4.5%!
Furthermore, analysts expect the company to generate north of $420 million in free cash flow this year, which indicates an 8% free cash flow yield or an 11% cash payout ratio.
In other words, if the company is serious about growing its dividend, I expect sky-high dividend growth rates in the next few years, further supported by aggressive buybacks.
A big part of this is the good outlook.
What’s Next?
Looking ahead, the company maintains its expectation of achieving low double-digit percentage volume growth for the full fiscal year 2024. Despite challenges, including adverse weather conditions impacting performance in January, Atkore is holding steady on its outlook for full-year net sales and adjusted EBITDA, which can be seen below.
The company also anticipates a sequential improvement in adjusted EBITDA from the second quarter to the third and then from the third to the fourth quarter.
Atkore Inc.
Beyond the financials, Atkore emphasized its positive position within the electrical industry, noting over 90% of its product portfolio supporting electrical infrastructure.
Atkore Inc.
Even better, the company’s optimism is grounded in anticipated growth in key end-market categories such as data centers, manufacturing, lodging, healthcare, education, and multifamily.
Atkore Inc.
This positive industry outlook aligns with reports from other major public electrical contractors and peers, which have indicated record backlogs and project positive growth, supporting confidence in the future of the entire industry.
Given the company’s impressive transition, I believe it is not only in a great spot to deliver strong dividend growth and buybacks but also outperform its industrial peers on a long-term basis.
Over the past five years, ATKR returned more than 540%, beating the Industrial Select Sector ETF (XLI) by a huge margin.
Although I do not expect ATKR to return 45.9% per year going forward, I believe that it is in a great spot to maintain elevated growth.
It also needs to be said that the stock is flying far under the radar. With a market cap of less than $6 billion, it is currently covered by just a handful of analysts.
Once ATKR grows, it will pop up on more screens and attract a lot more money – I think.
Valuation-wise, the company is trading at just 8x 2024E EPS, using the midpoint of its guidance.
I believe 8x earnings is way too cheap, even if the company grows its EPS by just 6% per year after 2024 (which is the current consensus outlook).
FAST Graphs
I also believe ATKR will gradually move to a >12x EPS valuation, which should pave the way for >15% annual returns in the years ahead – even with subdued EPS growth rates.
The only reason why I am not a shareholder yet is that I need to figure out how I will structure my portfolio if I add another industrial stock.
I also have my eye on a few other players, including Amphenol (APH), and I already own Carlisle, as I mentioned in this article.
Furthermore, because of the market’s recent rally, I’m a bit more careful when it comes to deploying a lot of cash.
Other than that, I believe ATKR is a fantastic stock that will likely continue to function as a wealth generator for its investors.
Takeaway
Atkore has emerged as a compelling investment, with its recent dividend initiation signaling confidence in future growth.
The introduction of the dividend, starting at 0.9%, opens the door for significant future growth potential, given its low payout ratio.
Moreover, despite facing economic headwinds, the company showed robust organic volume growth, particularly in the electrical sector.
With a positive industry outlook and a history of outperforming, ATKR, currently undervalued at 8x 2024E EPS, presents a promising opportunity for long-term investors.
