Atkore Inc

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

A leading manufacturer of electrical products primarily for the non-residential construction and renovation markets, as well as safety and infrastructure solutions, operating globally.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Atkore Inc. (ATKR), formerly known as Atkore International Group Inc., is a manufacturer and distributor of electrical products and safety and infrastructure solutions. Its products are used in electrical systems within new construction, maintenance, repair, and remodel (MRO) applications in the United States, along with a growing international footprint across Canada, Australia, New Zealand, and United Kingdom.

Business Overview

  • Revenue Distribution: Atkore primarily operates through two segments:
    • Electrical: This is the larger segment of the two, encompassing electrical conduit, cable and installation accessories for the non-residential construction markets, MRO projects and OEMs.
    • Safety & Infrastructure: This segment manufactures and designs solutions, including metal framing, mechanical pipe, perimeter security, and cable management for the protection and reliability of critical infrastructure, it represents a smaller revenue but higher-profit segment.
    • International sales contribute around 13% of overall sales.
  • Industry Trends:
    • The construction industry is a key driver for Atkore’s electrical products segment. Any changes or declines in the construction industry directly affect its earnings.
    • The trend towards sustainability, and the focus on safety and infrastructure upgrades, fuel the demand for their solutions. The trend towards more renewable energy also implies an increased demand for products like conduit, cabling etc to connect solar power equipment with transmission grids.
    • The electrical industry is highly competitive, with numerous other smaller players, while few others like Atkore offer a full-scale package.
  • What Makes Atkore Different:
    • Vertical integration: Atkore has several manufacturing plants that it operates itself, this leads to better efficiency as compared to other competitors.
    • Global reach: While the company is primarily known as a U.S.-based business, it is slowly expanding to international markets.
    • Strong brand recognition: The products that Atkore has are known for its quality and reliability.
    • Product and geographic diversification while primarily serving U.S. customers, it is slowly making its global presence known as well.

Financials Deep Dive

  • Revenue: The company’s revenue is dependent on the price of key raw materials that contribute a large percentage of their cost of sales. The company has seen rapid increase in revenues in the past years, due to high volume, and favorable pricing from their sales. In Q4 2023 the revenue was 1.02 Billion up from 923 million from last year, which was an increase of 11%. The company has an average YoY growth of 18.6% over the last 5 years.

  • Margins: A key highlight of Atkore is their adjusted EBITDA margins, which are consistently high, around 25 to 30% and is very well placed to survive industry cycles. In the latest report adjusted EBIDA margins were 27.3% a great display of the company’s ability to price products well, while also keeping its own costs under control.
  • The company has a very effective supply chain that helps mitigate the impact of fluctuations in material costs.
  • The company has been able to increase its product prices based on brand value, customer loyalty and performance, which further increases margins.

  • Atkore also operates in multiple diverse segments, which also helps it maintain its margins and profitability.

  • Cash Flow: * The cash flow from operations increased in fiscal 2023 to $969 million compared to $634.3 million in the prior year * Free cash flow is also at very impressive levels, and allows Atkore a lot of flexibility in managing and expanding the business.

  • Debt & Liquidity: * The net debt of the company is $780.8 million as of September 2023. * The company has a high debt to capital ratio around 49% which is on the higher end, however, the free cash flow for the company is very high as mentioned, so their current debt level is manageable.

  • Recent Performance:
    • In the Q4 of Fiscal 2023, the net income for Atkore was $164 million, which is 10% lesser than the last year. The stock price reaction to this was negative, but the company believes that this is due to an anticipated correction, and a higher baseline. They have been consistent in maintaining their margins and are hopeful of the same in the future as well.
      • The company is focused on expanding its presence in Mexico and Canada, expecting to increase sales in the near future.
      • Management has indicated that they might face challenges due to decreased non-residential construction growth in the short term, but are focused on increasing profits by focusing on high margin products and cost optimization.
      • The company’s CEO highlighted their optimism in the long term, with major investments in infrastructure and renewable energy to continue spurring growth in their business.

Moat Rating: 3 / 5

  • Justification:
    • Switching costs: For certain customers like hospitals and data centers, their existing relationships are critical. They won’t change partners until they have a very compelling reason to. Also, the switching costs for the type of products that Atkore offers are low, however, because they’re part of a larger complex system, there is a medium switching cost due to the cost of retooling and compatibility issues with other parts of the system. This creates a narrow economic moat.
    • Cost Advantage: Atkore’s vertical integration, especially within its manufacturing units, provides a cost advantage. They have control on costs due to the use of its own systems to manufacture components, which keeps costs low.

  • Economies of scale: They have a wide distribution network, they’re also growing their geographic presence. They’re one of the largest players in the market and should be able to leverage their size for better returns in the long term. * Brand value: Atkore has a strong brand recognition due to quality products, which has helped them develop a good position in the market as compared to its peers, though there is minimal evidence of it directly affecting pricing power. * Intangible assets: Atkore holds patents in the design of their products, and new innovative products, which further increases the stickiness of their products. However, patent protection does not provide it with a wide economic moat.

  • Risks to the Moat:
    • Increased competition: It is highly unlikely that new players will enter the market, but the existing players may begin competing for market share.
    • Disruptive technology: New, innovative products can make the company’s current lineup obsolete, making their current intangible assets and supply chain investments obsolete.
    • Economic cycles: Atkore’s business is very closely tied to the performance of the construction industry. Economic downturns can significantly impact their earnings and ability to generate income.
    • Volatile Input Costs: The cost of raw materials that Atkore utilizes is highly variable, and the company does not have complete control over prices. Thus, an increase in material input costs directly affects their operating profit, as well as free cash flow.

Business Resilience:

The company has demonstrated a good degree of resilience owing to the following factors * The company’s revenue, profits and free cash flow have been steadily rising in the past years, and has been able to recover quickly from short-term economic downturns. * Their management team has been good at navigating acquisitions and divestitures and the company has been able to improve earnings consistently over the last 5-6 years. * The company also follows very good business principles, including not overleveraging and sticking to its strategy.

Understandability: 2/5

  • Justification:
    • The basic business of producing electrical conduits is easy to understand.
    • The complexity lies in understanding the financial details and the accounting, especially when they are adjusted for the various acquisitions and divestitures undertaken by the company.
    • The specific advantages that make it a better choice over competitors are not immediately apparent. Thus it is not simple enough, that even a person with no business or financial knowledge could understand it without help.

Balance Sheet Health: 4/5

  • Justification:
  • The balance sheet is quite healthy with reasonable leverage of 49% debt to capital ratio, but this can also be quickly paid by the company’s cash flows.
    • They have a very healthy liquidity position.
  • The company has strong assets both in tangible and intangible form. The company’s goodwill from acquisitions is also quite high and does have a risk associated.
  • There are very few concerning financial obligations.
  • Overall, the company’s financial health is very stable and can sustain a financial downturn.