As part of our ongoing series here at The Acquirer’s Multiple, each week we focus on one of the stocks from our Stock Screeners, and why it’s possibly a deeply undervalued gem.
The Stock this week is:
Atkore Inc (ATKR)
Atkore Inc is a diversified industrials company and a manufacturer of electrical, mechanical, and safety infrastructure solutions. Atkore has two business segments; Electrical and Safety and Infrastructure. Net sales are highest in the electrical business line. The key product categories in the electrical segment are PVC conduit, steel conduit, and PVC-coated conduit, which are staples for electrical distributors. The key product categories in the safety and infrastructure segment include in-line galvanized mechanical tubes, metal framing and related fittings, and security bollards. Also, the company provides ancillary services to customers in the form of slitting and cutting structural steel sheets. Geographically, the company derives its key revenue from the United States.
A quick look at the share price history (below) over the past twelve months shows that the price is down 54.78%.
Source: Google Finance
One of the metrics we use in our screens is IV/P (Intrinsic Value to Price). Let us simplify what it means:
IV/P (Intrinsic Value to Price) tells you if a stock is a good deal or not based on how much value you’re getting for the price you pay. Here’s how it works:
- The Calculation: It adds up the stock’s ability to make money (Earning Power), grow (Incremental Growth), and pay back investors (Shareholder Yield). This gives you an idea of what the stock is really worth, called its Implied Value.
- The Meaning of IV/P:
- If IV/P is greater than 1, it means you’re getting more value than you’re paying for. For example, for every $1 you invest, you’re getting more than $1 of value. That’s a good deal!
- If IV/P is less than 1, it means you’re getting less value than you’re paying for. For example, for every $1 you invest, you’re getting less than $1 of value. That might not be a great deal.
- What It’s Used For:
- It’s a quick way to spot undervalued stocks (good deals).
- If IV/P is very low, like 0.6 (you’re only getting 60 cents of value for $1), it’s likely overpriced.
- Important Note: This is just an estimate. Other factors, like market trends or company issues, can affect how accurate this is.
So, IV/P helps investors find stocks that are “cheap” based on how much value they give back. Higher is usually better!
We currently have an IV/P of 2.0 for the company, which means the stock’s Implied Value is calculated to be 2.0 times greater than its current price. In simpler terms:
- For every $1 you invest, you’re potentially getting $2 of value.
- This is an extremely high ratio, which might suggest the stock is deeply undervalued or that there’s some mispricing or unusual calculation in the data.
Possible Reasons for the Undervaluation
1. Economic Uncertainty and Cyclicality:
- Construction Market Sensitivity: Atkore’s business is tied to the construction and infrastructure sectors, which are inherently cyclical. Concerns about a potential economic slowdown could make investors cautious about companies in these industries, leading to lower valuations.
- Interest Rate Hikes: Rising interest rates can dampen construction activity by increasing borrowing costs for developers and consumers.
2. Industry-Specific Challenges:
- Raw Material Costs: Fluctuations in the prices of raw materials like steel and copper can affect Atkore’s profitability. Uncertainty around these costs can make it difficult to predict future earnings, leading to investor hesitancy.
- Competition: The industries Atkore operates in can be competitive, with both established players and new entrants. Intense competition can put pressure on pricing and margins, impacting profitability.
- Supply Chain Disruptions: Global supply chain disruptions, like those experienced in recent years, can impact Atkore’s ability to source materials and deliver products, potentially affecting revenue and earnings.
3. Investor Sentiment and Market Dynamics:
- Growth vs. Value Investing: Atkore might be perceived as a “value stock” rather than a “growth stock.” In times when growth stocks are favored by investors, value stocks can be relatively undervalued.
- Market Overreaction: The recent profit outlook cut by Atkore might have led to an overreaction in the market, pushing the stock price down more than justified by the actual impact on long-term prospects.
- ESG Concerns: While Atkore is making efforts in sustainability, some investors might have concerns about the environmental impact of its operations or the broader industry, leading to lower valuations.
4. Misunderstanding or Lack of Awareness:
- Company Complexity: Atkore operates in a somewhat specialized niche within the broader construction and electrical markets. Investors might not fully understand the company’s business model, competitive advantages, and growth potential, leading to undervaluation.
- Limited Analyst Coverage: If there is limited coverage of Atkore by financial analysts, it can result in less information being available to investors, potentially contributing to undervaluation.
We currently have the company on an Acquirer’s Multiple of 4.60, the company has a FCF Yield of 17.46%, a ROA 5YearAverage of 21%, and a BuyBack Yield of 11%.
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