One company that fared well recently in this space is a firm called LCI Industries (LCII). Even after seeing shares rise by a respectable amount, further upside does seem to still exist. Having said that, the company is approaching the point at which it might be considered a fair value, especially if we assume an eventual return to lower activity levels. So for that reason, while investors should likely be bullish moving forward, they should be so cautiously.
The last time I wrote about LCI Industries was in an article published in September of 2021. In that article, I rated the company a bullish prospect. I said that it had a favorable risk to reward ratio, with the likely bearish scenario resulting in shares being more or less fairly valued. Since the publication of that article, the company has generated a return for investors of 15.2%. That beats out the 7.4% achieved by the S&P 500 over the same window of time.
It is worth noting that only one quarter worth of data has been released since the publication of the aforementioned article. But that data has been upbeat. Take, as an example, the revenue generated by the firm. During that quarter, sales came in at $1.17 billion. That is 40.8% higher than the $827.7 million the firm generated the same quarter one year earlier. As a result of the strong revenue growth, sales for the first nine months of 2021 came in at $3.26 billion. That is 61.9% higher than the $2.01 billion management reported for the first nine months of the company’s 2020 fiscal year. The firm continues to benefit from strong demand for recreational vehicles.
*Created by Author
One unsuspecting winner of the COVID-19 pandemic has been the recreational vehicle market. As people seek to engage in social distancing and as some had time off work because of the crisis, the sale of recreational vehicles rose meaningfully. Naturally, this would have a positive impact on the companies that operate here, including those that provide various components for the vehicles in question.
Now this is not to say that everything was great for the company during the quarter. Take, as an example, net profits. Net income in the latest quarter came in at $63.4 million. That is down slightly from the $68.3 million generated one year earlier. Even with this, however, net profits for the first nine months of 2021 totaled $205.4 million. That is almost double the $109.7 million generated in the first nine months of 2020. Other profitability metrics followed a similar trend.
Operating cash flow, adjusted for changes in working capital, came in at $99.89 million. That is down from the $114.38 million seen a year earlier. And EBITDA dropped from $119.39 million to $118.14 million. Even so, operating cash flow for the full nine months recorded for 2021, after adjusting for changes in working capital, it came in at $311.33 million. This compares to the $198.58 million seen a year earlier. And EBITDA grew during this time frame from $240.13 million to $365.44 million.
*Created by Author If we decide to analyze the results experienced so far for the 2021 fiscal year, what we get is a scenario where net profits should come in around $296.7 million. Operating cash flow should be around $362.8 million, while EBITDA is looking to come in at about $516.5 million. Based on these figures, it becomes fairly simple to value the enterprise. For instance, on a forward basis, the company seems to be trading at a price to earnings multiple of 13.3.
The price to operating cash flow multiple is even lower at 10.9, while the EV to EBITDA multiple stands at 9.6. To put these figures in perspective, I then decided to look at the company’s pricing based on financial results achieved in 2020. The price to earnings multiple for the company for that year was 25. The price to operating cash flow multiple was lower at 17.1 and the EV to EBITDA multiple should have been about 14.7. That is all based on current pricing compared to the metrics generated back then. *Created by Author
Knowing all of this, we can then compare the company to the pricing of some other similar firms. The five firms chosen can be seen in the table below. On a price to earnings basis, these companies ranged from a low of 3.9 to a high of 14.6. Using the 2021 figures, three of the five companies were cheaper than LCI Industries. At the end of the same time period, using the price to operating cash flow approach resulted in a range of 2.1 to 12.5. Once again, three of the five companies were cheaper than our target. But where the picture changes a bit is when we look at it through the lens of the EV to EBITDA multiple. This results in a range of 1.8 to 7.7. Using this approach, LCI Industries becomes the most expensive of the group. With a net leverage ratio of less than 2 (or less than 3 if we use 2020 figures), it’s not difficult to justify shares trading at such a premium to the competition. This is especially true when the overall pricing of the company shows a firm that is still fairly cheap.
For this reason, I would make the case that the company is still a favorable risk to reward prospect. But I would also make the case that this is less true than it was when I wrote about the firm a few months back. Between a change in the fundamentals and the appreciation in share price the company exhibited, the firm is definitely trading much closer to fair value territory than it was previously. In short, the easy money appears to have been made.
LCI Industries is an interesting company at this time. Even though shares have appreciated nicely in recent months, and even though financial performance on the bottom line was slightly disappointing, the overall pricing of the business suggests that further upside might still exist. Even if financial performance reverts back to what we experienced in 2020, it is difficult to say that shares are anything more than fairly valued. Company Price / Earnings Price / Operating Cash Flow EV / EBITDA LCI Industries 13.3 10.9 9.6 Patrick Industries (PATK) 9.3 9.7 7.1 Garrett Motion (GTX) 9.0 N/A 1.8 Superior Industries International (SUP) N/A 2.7 5.3 Tenneco (TEN) 3.9 2.1 4.4 Standard Motor Products (SMP) 14.6 12.1 7.7 Takeaway