NASDAQ: PGTI
Current Price: $11
Recommendation
Intrinsic Value: $16
Target Price: $18
November 5, 2015
Company Overview
Industry: Building and Construction
PGT is the nation’s leading manufacturer and supplier of impact-resistant windows and doors. PGT makes windows and doors to provide protection from hurricaneforce winds, wind-borne debris, and meet regional building code standards. It also provides architectural system products, non-impact-resistant aluminum & vinyl frame windows and doors, non-glass sliding panels for porch enclosures, and commercial storefront window system and entry doors. PGT distributes these windows and doors throughout the Southeastern United States, the Gulf Coast, Coastal mid-Atlantic, the Caribbean, Central America, and Canada.
Market Cap: $587.38 M
Price Performance
BUY Key Statistics Sector: Industrials
52 Week High: $16.28 52 Week Low: $8.28 Trailing P/E: 31.65 Forward P/E: 15.22
P/S: 1.64 EV/EBITDA: 13.06 Beta: 1.49 ROE: 23.25% ROA: 11.75%
Investment Thesis
Risks
Pricing power as an industry leader in a niche market
Unfavorable economic conditions
Continual vertical integration of the supply chain
Heavy concentration of sales in Florida
Increasing manufacturing capacity to capture sales in the growing market
Volatile prices of raw materials
Possibility of a dilution of brands due to the acquisition of CGI Windows and Doors, Inc.
Slowdown or decline in remodeling and new construction markets
Building codes and regulations for impact-resistant windows are becoming more stringent in Florida
Hedge against raw material prices with futures contracts
A societal need for impact-resistant windows and doors in hurricane-prone areas of the U.S.
Analysts: Zoe Knapke, Austin Boyle, Brandon Reagan, Beto Ramos, Dylan Kesterson
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NASDAQ: PGTI
Current Price: $12 $11
Target IntrinsicPrice: Value: $24$16 Intrinsic TargetValue: Price: $16 $18
November 5, 2015
Investment Thesis Pricing power due to being an industry leader in a niche market PGT is an industry leader in manufacturing and supplying impactresistant doors and windows, operating in a niche market. There are many companies in the window and door industry around the U.S., but PGT differentiates itself from competitors by providing high quality customized impact-resistant products in one of the largest markets for impact-resistant windows and doors, Florida. Continual vertical integration of the supply chain PGT’s manufacturing facility produces fully-customized windows and doors. It is vertically integrated with glass insulating, tempering and laminating facilities, which provide PGT with a consistent source of impactresistant laminated and insulated glass, shorter lead times, and lower costs relative to third-party sourcing. Increasing manufacturing capacity to capture sales in the growing Florida market
PGT expanded its glass processing capacity with the completion of a new facility, and are completing the second phase of this expansion by purchasing additional laminating and insulating equipment. To meet the increased demand, PGT has also been hiring and training new employees for direct and indirect support. Building regulations for impact-resistant windows are becoming more stringent in Florida The 5th Edition Florida Building Code went into effect June 30, 2015. The 5th Edition separates building types by Risk Categories into three wind speed maps. PGT works closely with building officials in Miami-Dade to help develop code requirements, which are among the most stringent in the nation. Hedge against raw material prices with futures contracts PGT attempts to minimize risk from severe price fluctuations by entering into aluminum forward contracts to hedge fluctuations in the purchase price of aluminum extrusion used in production. PGT utilizes derivative financial instruments to hedge price movements in its aluminum materials. PGT’s contracts are initially designated as cash flow hedges since they are believed to be highly effective in offsetting changes in the cash flows attributable to forecasted purchases of aluminum. A societal need for impact-resistant windows and doors in hurricane prone areas of the U.S. With increasing building standards and a growing construction market, the demand for impact-resistant windows and doors is increasing. Analysts: Zoe Knapke, Austin Boyle, Brandon Reagan, Beto Ramos, Dylan Kesterson
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NASDAQ: PGTI
Current Price: $11
Intrinsic Value: $16
Target Price: $18
November 5, 2015
Business Model PGT manufactures and supplies various impact-resistant window and door products to residential new construction and remodel end markets. These products are sold through independent distributors on a custom, made-to-order basis. PGT significantly outperforms its competitors by producing the highest quality product, using the most efficient processes to reduce lead times and cut costs. Customers PGT has a highly diversified customer base that is comprised of 1,100 window distributors, building supply distributors, widow replacement dealers and enclosure contractors. This broad distribution network allows flexibility in meeting demand as it shifts between the residential new construction and repair and remodeling end markets. Its largest customer accounts for approximately 4% of net sales with the top ten customers accounting for approximately 20% of net sales. PGT does not supply products directly to homebuilders.
Segments
PGT’s sales are comprised of residential new construction and home repair and remodeling end markets, representing 32% and 68% respectively, in 2014.
Materials PGT utilizes multiple materials in order to build its products. In order to build impact-resistant windows and doors, PGT uses aluminum, vinyl extrusions, class ionoplast, and polyvinyl butyral. These inputs are supplied by several suppliers that can be terminated at anytime. PGT is able to hedge the risk of volatile input costs by utilizing future contracts. Analysts: Zoe Knapke, Austin Boyle, Brandon Reagan, Beto Ramos, Dylan Kesterson
3
NASDAQ: PGTI
Current Price: $11
Intrinsic Value: $16
Target Price: $18
November 5, 2015
Products PGT manufactures complete lines of premium, fully customizable aluminum and vinyl windows and doors and porch enclosure products, targeting both the residential new construction and remodeling end markets. Each of its products are focused on energy efficiency. PGT products carry an additional trademarked product name. WinGuard targets hurricane-prone coastal states in the U.S., Caribbean and Central America. WinGuard combines heavy duty aluminum or vinyl frames with laminated glass to provide protection from hurricane force winds and wind-market borne debris that satisfy increasingly stringent building codes. PremierVue is a product line of impact-resistant vinyl windows and door products that are tailored for mid-to-high end of the replacement market. PremierVue targets single and multifamily homes as well as low to mid-rise condominiums. Architectural Systems offers protection from hurricane force winds for mid and high rise buildings. Estate Collection recently acquired CGI’s premium, high end aluminum impact-resistant product line. Estate Collection targets elegant homes, prestigious resorts, hotels, schools and office buildings. Sentinel is CGI’s product line that offers impact-resistant windows and doors that provide exceptional quality, craftsmanship, energy efficiency and durability at an affordable price. Targa is CGI’s line of vinyl energy efficient, impact-resistant windows designed specifically to exceed the Florida impact codes. Aluminum PGT offers a complete line of fully customizable non impact-resistant aluminum frame windows and doors. Vinyl PGT offers a complete line of fully customizable, non impact-resistant vinyl frame windows and doors. Eze-Breeze is a non-glass vertical and horizontal sliding panels for porch enclosures are vinyl-glazed, aluminum framed products used for enclosing screened in porches that provide protection from inclement weather. PGT Commercial Storefront System is engineered to provide a flexible yet economic solution for a variety of applications. EnergyVue is a new and non impact vinyl window featuring energy efficient insulating glass that meets or exceeds ENERGY STAR standards to help save consumers on energy costs. Analysts: Zoe Knapke, Austin Boyle, Brandon Reagan, Beto Ramos, Dylan Kesterson
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NASDAQ: PGTI
Current Price: $12 $11
Target IntrinsicPrice: Value: $24$16 Intrinsic TargetValue: Price: $16 $18
November November 5, 5, 2015 2015
Industry Overview The industry for window and door manufacturers is a mature industry that has demonstrated high correlation with the demand of the construction industry and the home improvement industry. Improving construction demand has contributed to the growth of the window and door manufacturing industry. Increased consumer confidence and discretionary income has lead to higher spending in the housing and home improvement market. Furthermore, the key drivers of this industry include the condition of the commercial and residential construction industry, demand for home improvement and repair, the price of aluminum, the price of polyvinyl butyral, and the price of glass. However, profitability throughout this industry can be achieved through efficient supply chain management, pricing power due to supplier power, and hedging against raw material inputs. Over the holding period, we expect the continued strength in the construction industry to drive growth, even as prices of commodities remain volatile. In addition, the window and door manufacturing industry is highly fragmented with many participants, and has a low level of market concentration, as no one company is expected to control more than 5% of the market share. Thus, the majority of the companies included in this industry are small, and many are local or regional manufacturers targeting a specific geographical scope. These companies focus on selling products to local or regional retailers or distributors, largely due to different state and local building codes and regulations that need to be met. However, there is expected to be an increased consolidation throughout the industry as demand begins to increase, and economies of scale are able to contribute to profitability. Particularly, the impact-window and door industry has experienced substantial growth recently due to increasingly strict enforcement of Florida building codes and regulations, especially in hurricane and stormprone regions of the state. As these regulations evolve, the demand for impact-window and doors, as well as energy efficient windows, will increase the demand for these particular products. This market is not only expected to grow throughout the state of Florida, but also expand into additional coastal regions as standards increase and are adopted by more regional governments. Analysts: Zoe Knapke, Austin Boyle, Brandon Reagan, Beto Ramos, Dylan Kesterson
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NASDAQ: PGTI
Current Price: $11
Intrinsic Value: $16
Target Price: $18
November 5, 2015
Macro Drivers PGT’s windows and doors market depends heavily on the housing market in Florida where 88% of its revenues are realized. New home starts and building permits are two metrics PGT can use to determine the relative strength of the custom windows and doors industry within Florida. New housing starts have historically fallen within a range of approximately 1,000,000 and 2,500,000 per year. During the 2008 financial crisis, housing starts hit a record low of approximately 500,000. Mean reversion back to the historical range following the 2008 financial crisis has begun since, but is still below the average housing start levels. Based on our analysis, the recovery in new housing starts has not yet subsided, and will continue to increase back to the mean in the next 3-5 years.
The market for impact-resistant windows and doors is primarily in the Southern United States along coastal states. New housing starts in the South compared to the United States has historically shown higher growth rates year over year. Over the past four years, the South has outpaced the U.S. new housing starts by 2% annually. Within the past four years, new residential housing starts has grown approximately 8% greater than new commercial housing starts in the South. We expect the growth rate for new housing starts in the South to remain at or near 12% in the next few years. Specifically in Florida, building permits have been trending upward. In the last year alone, Florida building permits have expanded 70% year over year. We expect the increase of new building permits to result in new housing starts, both residential and commercial in the state of Florida. Analysts: Zoe Knapke, Austin Boyle, Brandon Reagan, Beto Ramos, Dylan Kesterson
6
NASDAQ: PGTI
Current Price: $11
Intrinsic Value: $16
Target Price: $18
November 5, 2015
Competitor Profiles Local and Regional Window and Door Manufacturers This group of competitors consists of numerous local job shops and small manufacturing facilities that tend to focus on selling products to local or regional dealers and wholesalers. Competitors in this group typically lack marketing support, the service levels, and quality controls demanded by larger distributors, as well as the ability to offer a full complement of products. National Window and Door Manufacturers This group of competitors tends to focus on selling branded products nationally to dealers and wholesalers and has multiple locations. Active Protection This group of competitors consists of manufacturers that produce shutters and plywood, both of which are used to actively protect openings. Once installed, no activity is required to protect a home from storm related hazards. Competitive Advantage The principal methods of competition in the window and door industry are the development of long-term relationships between window and door dealers and distributors, and the retention of customers by delivering a full range of high-quality products on time while offering competitive pricing and flexibility in transaction processing. Trade professionals such as contractors, homebuilders, architects and engineers also engage in direct interaction and look to PGT manufacturing for training and education of products and codes. The window and door industry is highly fragmented, and the competitive landscape is based on geographic scope. Some of PGT’s competitors may have greater geographic scope and access to greater resources and economies of scale. PGT has taken advantage in the market by leading in the U.S. impact-resistant window and door market. The windows and doors have become so successful that they have received award winning designs and high quality recognition from the community. PGT focuses on attracting and retaining distributors and dealers by providing exceptional customer service and offering competitive pricing. PGT has advanced knowledge of building code requirements and technical expertise. Using its industry experience, PGT has helped in the regulatory processes in the Broward and Miami-Dade counties for hurricane safety. With the strategic acquisition of CGI Windows and Doors Holdings, Inc. (CGI), which became a wholly-owned subsidiary of PGT in 2014, it has expanded the geographic scope of PGT into the Miami-Dade County region of Florida. PGT will continue to expand its geographic scope, starting in Florida to remain an industry leading provider of impact-resistant windows and doors in the U.S. PGT has registered trademarks in the U.S. Additionally, PGT owns several patents and patent applications concerning various aspects of window assembly and related processes. Analysts: Zoe Knapke, Austin Boyle, Brandon Reagan, Beto Ramos, Dylan Kesterson
7
NASDAQ: PGTI
Current Price: $11
Intrinsic Value: $16
Target Price: $18
November 5, 2015
Risks and Mitigants Unfavorable macroeconomic conditions The economy in Florida and throughout the U.S. could negatively impact demand for products as it has in the past, and macroeconomic forces such as employment rates, demographic trends, interest rates, consumer confidence, and the availability of credit could have an adverse effect on sales and results of operations. Cost of raw materials PGT could experience significant fluctuations in the cost of raw materials as PGT does not have control over the global demand for aluminum, fluctuations in oil prices, speculation in commodities futures, and the creation of new laminates. PGT has entered into a two-year supply agreement through December 2016 with a major producer of ionoplast inter layer that provides it with a reliable, single source for ionoplast. Historically, PGT been able to pass on significant cost increases to customers. Building code requirements The market for impact-resistant windows and doors depends partly on PGT’s ability to satisfy state and local building codes that require protection from wind-borne debris. If the standards in such building codes are raised, PGT may not be able to meet its requirements, and demand could decline. Conversely, if the standards in such building codes are lowered or are not enforced in certain areas, demand may decrease. High competition The window and door industry is highly competitive. PGT faces significant competition from numerous small, regional producers, as well as certain national producers. New competitors may enter the industry, and existing competitors may increase efforts to expand presence in the impact-resistant market. PGT has the most experience with creating finished impact-resistant and other window and door products. Heavy concentration of sales in Florida PGT’s business is heavily concentrated geographically in Florida with approximately 88% of sales generated in this state. This focus allows PGT to optimize manufacturing efficiencies and logistics. PGT still has room for growth into other markets, states, and potentially even internationally. Florida is its target market due to the wind-borne debris demand. The Acquisition of CGI In the third quarter of 2014, PGT acquired CGI Windows and Doors, Inc. This recent acquisition has lead to higher debt, but the addition of CGI’s branded products and presence in Florida to PGT’s already established line of branded products in Florida will benefit PGT through higher sales and market share. Analysts: Zoe Knapke, Austin Boyle, Brandon Reagan, Beto Ramos, Dylan Kesterson
8
NASDAQ: PGTI
Current Price: $12 $11
Target IntrinsicPrice: Value: $24$16 Intrinsic TargetValue: Price: $16 $18
November 5, 2015
Building Code and Regulations PGT designs and manufactures impact-resistant and energy efficient products that are compliant with state and local government mandated building codes. Additionally, the state of Florida requires residential and commercial windows to be energy efficient to some capacity, and PGT manufactures its window products accordingly. Many of the states and regions PGT distributes in have stringent building codes and regulations that are increasingly becoming more stringent and more strictly enforced.
Building codes regarding impact-resistant windows and doors can be found in the Florida Building Code 5th Edition: Building handbook, Chapters 24: Glass and Glazing - Sections 2410 through 2415; Chapter 16: Structural Design – Sections 1605, 1607, 1611, and 1616 through 1626; Chapter 34: Existing Structures - Section 3407
Building codes regarding glass specification requirements can be found within the ASTM C 1036 and GSA DD-G-451c Standard for Glass, Flat and Corrugated, for Glazing Mirrors and Other Uses
Testing standards for impact-resistant windows and doors can be found within the TAS 202 and provisions from ANSI/AAMA/MWWDA 101/IS 2, and the American Architectural Manufacturers Association Standard 501
Building codes regarding load effect requirements and regulations can be found in the Florida Building Code 5th Edition: Building handbook Chapters 18 through 24
Wind load regulations and determination of wind loads can be found in Chapter 16: Structural Design - Section 1609: Wind Loads
Energy efficiency building codes can be found in the Florida Building Code 5th Edition: Energy Conservation handbook, Chapters 3 and 4 in both the commercial and residential provisions
Analysts: Zoe Knapke, Austin Boyle, Brandon Reagan, Beto Ramos, Dylan Kesterson
9
NASDAQ: PGTI
Current Price: $11
Intrinsic Value: $16
Target Price: $18
November 5, 2015
Management Rodney Hershberger Chief Executive Officer and Chairman of the Board Mr. Hershberger, co-founder of PGT, has served PGT since its founding in 1980. Appointed as CEO in 2005, Hershberger led the company's IPO in 2006 and was elected as Chairman of the Board in 2014. Previously, he served as President, Executive Vice President and COO. Brad West Chief Financial Officer Mr. West joined PGT in 2006, serving as Director of FP&A, Director of Accounting and Finance, and Controller through 2014. With his most recent appointment as CFO, West is responsible for PGT’s Accounting and Finance Departments, as well as its Investor Relations, Treasury, and Risk Management functions. Jeffrey T. Jackson, CPA President and Chief Operating Officer
Mr. Jackson joined PGT in November 2005 as Vice President and CFO. The following year, he helped lead the Company's IPO, and was later named Executive Vice President. In 2014, Jackson was appointed President and COO with responsibilities of overseeing the Company’s strategic plan, as well as all aspects of operations. Todd Antonelli Vice President, Sales, Marketing, and Customer Service David McCutcheon Vice President, Logistics Monte Burns Vice President, Manufacturing Mario Ferrucci, III Vice President and General Counsel
Debbie L. LaPinska Vice President, Human Resources
Analysts: Zoe Knapke, Austin Boyle, Brandon Reagan, Beto Ramos, Dylan Kesterson
10
NASDAQ: PGTI
Current Price: $11
Intrinsic Value: $16
Target Price: $18
November 5, 2015
Valuation After research and analysis of projecting PGTI’s top and bottom line revenue growth using market demand for their products, and margin expectations based on management’s decisions, we forecasted free cash flows for PGT through 2018. The FCFE model determines an intrinsic value of $16.12 and a price target of $18.67 for 2018. The EPS figures were taken directly from our pro-forma income statement projections, the terminal value was taken from our EV/EBITDA model’s 2018 base case, and the beta used in our capital asset pricing model was taken from a 36-month regression calculation. In calculating the intrinsic value, a terminal value of $18.67 was used. We based our CAPM calculation on a 1.49 beta, a 5.5% market risk premium, and a 2.2% risk free rate yield. We have provided a sensitivity analysis for the FCFE Model to offer a variety of outcomes regarding the valuation. The discount rate ranges from 7.38% to 13.38%, and the 2018 terminal values ranges from $12.67 to $24.67. Our FCFE model has lead us to conclude this security is undervalued. PGT is fairly valued at $16.12 and is trading at a discount of approximately 46.56%.
Analysts: Zoe Knapke, Austin Boyle, Brandon Reagan, Beto Ramos, Dylan Kesterson
11
NASDAQ: PGTI
Current Price: $11
Intrinsic Value: $16
Target Price: $18
November 5, 2015
Valuation
The second model used in our valuation of PGT is the EV/EBITDA model. Historically, the company has had falling multiples over time, largely attributed to historically consistent earnings growth from PGT in an industry that has become very profitable since the housing recovery following the 2008 financial crisis. We expect the margins to settle in around 11 by 2018, which was used in the EV/EBITDA model calculation. The EV/EBITDA model determined a base case value in 2018 of $18.67. Along with the EV/EBITDA model is a sensitivity analysis for those investors looking at various market scenarios. The sensitivity analysis captures a range of 8-14 in EV/EBITDA multiples compared against an EBITDA range of $91.7 million and $103.7 million surrounding a base case EBITDA in 2018 for PGT.
Analysts: Zoe Knapke, Austin Boyle, Brandon Reagan, Beto Ramos, Dylan Kesterson
12
NASDAQ: PGTI
Current Price: $11
Intrinsic Value: $16
Target Price: $18
November 5, 2015
Valuation
Analysts: Zoe Knapke, Austin Boyle, Brandon Reagan, Beto Ramos, Dylan Kesterson
13
NASDAQ: PGTI
Current Price: $11
Intrinsic Value: $16
Target Price: $18
November 5, 2015
Valuation
Analysts: Zoe Knapke, Austin Boyle, Brandon Reagan, Beto Ramos, Dylan Kesterson
14