About Simpson Manufacturing
Founded in 1956 and based in Pleasanton, California, Simpson Manufacturing Co. Inc. (SSD, Financial) designs, engineers and manufactures wood and concrete construction products. According to the 10-K for 2022, one point of differentiation from its competitors is quality, as its products are designed to perform at high levels, be easy to use and cost-effective for customers.
Its wood construction products include truss plates, fasteners and lateral resistive systems for wood construction. On the concrete side, it offers adhesives, chemicals, mechanical anchors, carbide drill bits and more.
It has a market cap of $4.18 billion as of this writing and had trailing 12-month revenue of $2.116 billion.
This company has a solid set of fundamentals combined with a strong industry outlook and a cheap valuation - all of which point towards it being a potential value opportunity.
Industry and company outlook
Let's first look at the bigger picture, which is residential home construction in the U.S. After explaining seasonal and weather factors, Simpson wrote in its annual filing, “The Company’s sales are also dependent, to a degree, on the North American residential home construction industry.”
According to data provided by Statista, residential construction dipped to a post-financial-crisis low in 2010, worth just $249.11 billion. With the exception of 2019, it has increased every year since then, hitting an estimated $880.63 billion in 2022.
While the industry has its ups and downs, there is a longer-term tailwind that has helped keep the company growing. Namely, the U.S. has been underbuilding for years as homebuilders seek to prevent a major collapse in demand like in the Financial Crisis.
Looking forward, Simpson sees construction growing to $1.050 trillion by the end of 2026. At the same time, the federal government is investing heavily in infrastructure and modernizing. This will mean not only opportunities in infrastructure construction, but also demand for housing for construction and allied workers.
On April 7, 2022, Simpson announced it had completed its acquisition of Etanco Group, a company that designs and manufactures fixing and fastening solutions for the European construction market. In the news release announcing the closure, it did not indicate what, if any, accretive earnings would be expected. The roughly $800 million purchase explains why Simpson’s debt jumped to $635 million in 2022.
Growth
Turning to the fundamentals, we see another reason for optimism on Simpson's future. The company has reported solid long-term growth in its revenue, Ebitda and earnings. Over the past three years, it has averaged annual revenue growth of 24.80%. From that level of revenue growth, it has managed to grow Ebitda and earnings per share without non-recurring items even more quickly. Ebitda has grown by an average of 35.10% per year over the past three years, while EPS without NRI grew by an average of 37.60%. Free cash flow has grown by an average of 27.30% per year.
Financial strength
Despite taking on debt to finance last year’s acquisition, Simpson has a solid balance sheet. Its interest coverage ratio is 60.84, it has a Piotroski F-Score of 6 out of 9 and an Altman Z-Score of 5.13, which is well into the safe zone.
Profitability
The company's profitability metrics are all industry-leading for the forest products industry. That includes an operating margin of 22.45%, a net margin of 15.78% and a return on equity of 25.89%.
Shareholder returns
The dividend has risen every year since 2014 and now amounts to $0.26 quarterly or $1.04 annually. That works out to a dividend yield of 0.93%, which is low by industry standards. However, on average, the dividend payment has grown by 4.2% per year over the past three years.
The company has also bought back its own shares, by an average of 1.30% per year over the past three years. The repurchases, along with the steadily increasing dividend, indicate that the board of directors and management are dedicated to providing shareholder returns.
Valuation
I expected a company with all these strengths to be expensive, but that’s not the case for Simpson based on several key metrics. The GF Value chart estimates the intrinsic value at $173.44, which is less than share price of $112.64 as of this writing, giving the stock a significantly undervalued rating.
It has a price-earnings ratio of 14.53, which is slightly below average for the industry. When we add growth to the equation with the five-year Ebitda growth rate of 27.30%, we arrive at a PEG ratio of 0.53, which also indicates undervaluation.
The same holds for the discounted cash flow model. The GuruFocus DCF calculator gives me a fair value estimate of $266.68 when I plug in an estimated earnings per share growth rate of 20% per year over the next 10 years and a margin of safety of 10%. That growth estimate may seem high, but the company has grown earnings by an average of 23% per year over the past decade.
Gurus
Simpson is owned by eight of the gurus followed by GuruFocus, according to their latest 13F filings. At the end of December 2022, John Rogers (Trades, Portfolio) of Ariel Investment owned 625,824 shares, Chuck Royce (Trades, Portfolio) of Royce Investment Partners held 483,318 shares and Jim Simons (Trades, Portfolio) of Renaissance Technologies had 141,800 shares.
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
Institutional investors hold 72.77% of shares outstanding, while insiders own 16.38%. That’s an excellent show of management’s alignment with the interests of shareholders.
Conclusion
Several major indicators suggest Simpson Manufacturing may be undervalued with strong industry and company growth tailwinds, boosted by the small-cap status, as small-caps have more room to grow compared to large-caps.
