Patrick Industries

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

A leading component supplier for the recreational vehicle, marine, manufactured housing, and industrial markets, offering a diverse range of products including building products, fasteners, and electrical components,

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.

Patrick Industries (PATK) operates in a fragmented, cyclical, and competitive industry. This means a narrow moat rating of 2 is applicable, with limited pricing power and high reliance on the industry’s performance.

Business Overview:

Patrick Industries is a manufacturer and distributor of component solutions across several niche industries, including RV, marine, manufactured housing, and industrial markets. This makes it a cyclical company and heavily tied to the housing and transport economy.

Their main revenue drivers are component sales for RVs, manufactured homes, and boats with these products also being sold across retail, wholesale, and OEM channels.

  • Manufacturing: This segment produces building components such as wall panels, doors, and frames, in addition to various components used in RVs, boats, and manufactured homes.
  • Distribution: The company operates a distribution business that provides a variety of maintenance, repair, and operations products to manufacturers and aftermarket customers.

Market Conditions: PATK’s operations are heavily influenced by the cyclical demand in its primary markets. Recent periods of high consumer demand fueled increased sales in recreational vehicles and manufactured homes, leading to a significant build up in inventory at all levels and a decrease in their cash flow which they are now working to reduce to their normalized levels. This recent buildup has resulted in less purchasing by customers, lower volumes and higher interest costs.

Industry Trends and Competitive Landscape:

  • Cyclical Demand: All of PATK’s industries face cyclicality and are sensitive to economic downturns that can cause revenue to drop quickly, thus lowering profitability.
  • Fragmented Market: The component supply markets are fragmented, with several players competing for market share. This makes it difficult for companies to gain any significant pricing power.
  • Competition: While PATK has a diversified portfolio of products and customers, it still faces competition from other manufacturers and distributors. The supply chain challenges have highlighted how they can compete more efficiently, specifically through their own distribution channels.

What Makes the Company Different?

Vertical integration is a key aspect of Patrick’s business, and this is a key differentiator. They manufacture and also distribute the product, giving them insight into both parts of the supply chain. This also has benefits in times of logistical issues.

  • Product Breadth: PATK has a wide range of products across their target markets.
  • Distribution Network: PATK has a wide distribution network, which allows it to deliver products to its customers quickly and efficiently.
  • Customer Relationships: By integrating their products into the final products of their customers, PATK creates better relationships. This also creates some stickiness, but it isn’t enough to give a high customer switching cost or moat.
  • Acquisitions: PATK has a history of acquiring and integrating other businesses, expanding its scale and product range which increases its potential but also carries execution risk.

Financial Analysis:

  • Profitability and Margins:
    • Gross profit margins have hovered around the 20% range, indicating a consistent but not very high pricing power.
    • Net profit margins have ranged from 5% to 10%, showing that earnings are highly sensitive to external conditions and to margins, indicating low pricing power.

The gross margins are more consistent but this still represents low pricing power from the customer side and a higher reliance on supply and material expenses.

  • Revenue Growth:
    • In recent years, their revenue growth has been mostly tied to RV demand.
    • The recent quarters have had a drop in sales. They are now dealing with high inventory levels and a low demand which has hurt their operating income.
  • Cash Flow:
    • Cash flow from operations is usually high, but recently they’ve been buying back lots of stock and have seen free cash flows turn negative due to reduced profits and higher inventory. They have increased debt to compensate.
    • They have a habit of spending money on stock buybacks when it is not needed.
  • Balance Sheet:
    • Their total liabilities are approximately equal to their equity, and total assets are twice the size of their equity. The balance sheet is not as strong as it could be but is still well within industry standards.
    • Their tangible book value is negative, meaning that if the company was liquidated, that shareholder value would be wiped out. This isn’t a risk for well-run companies, but is still a sign of risk.
    • Their debt has increased lately due to acquisitions and lowered profitability.
    • They have a high reliance on debt for operations.

Management’s commentary: Management is optimistic about long-term growth and believe their recent acquisitions will deliver great value, and help diversify away from dependence on the RV segment. They are currently working to reduce their inventory and bring back up free cash flows. They are managing their balance sheet and liquidity during these tough times. They are also focused on employee safety.

Moat Analysis:

  • Intangible Assets: They have a wide range of brands, but this doesn’t give them specific pricing power.
  • Switching Costs: While the integration into customer products creates some stickiness, they still face high competition, therefore, this is considered low.
  • Network Effect: No network effect is evident in this company.
  • Cost Advantages: They have some cost advantages from geographical locations, distribution network, and unique resources, but the highly fragmented and competitive industry negates a large portion of those advantages.

Moat Rating: 2 / 5

  • The reasons for this rating include a lack of pricing power, cyclicality in the industry, and high competition. While PATK has some competitive advantages like scale, breadth, and a vertically integrated supply chain, these are often quickly overcome by competitors and thus don’t form an impenetrable or sustainable moat.

Risks to Moat and Business Resilience:

  • Economic Downturns: The largest risk to PATK is the downturn in their key industries-Recreational Vehicles, Manufactured Homes, Boats. If sales for these goods goes down, then PATK will have less revenues and less opportunity to generate excess profits.
  • Competition: Increased competition may also erode PATK’s pricing power.
  • Supply Chain Disruptions: Since they are a manufacturing and distribution company, they are at risk from a disruption in their supply chain. These can be from geopolitics or other factors.
  • Execution Risk: Management has been aggressive with acquisitions, and integrating companies brings a certain execution risk with it.
  • Dependence on Cyclical Industries: Their dependence on RV, marine, and MH industries exposes them to fluctuations that may impact their ability to remain profitable. They have started focusing more on distribution and industrial segments to further diversify revenues and reduce this risk.
  • Management Team: Despite being a business with clear rules, a lack of good judgement in management can still lead to large losses. They have been shown to prioritize repurchases over cash flows, which does not benefit shareholders as a whole, leading to a need for better oversight of management.
  • Debt: High use of debt for operations and acquisitions increases the bankruptcy risk for the company, if they are unable to pay the debt.
  • Goodwill: Their goodwill balance is very high and an impairment to those assets would greatly affect their value.

Business Resilience: Despite the risks mentioned above, the company can endure these risks thanks to the diverse supply chain and management’s willingness to adjust and reduce spending when needed. Their vertical integration gives them control over their supply chain. This flexibility and the multiple niche markets provide them with a higher degree of resilience.

Understandability Rating: 2 / 5

  • The business model of PATK is simple enough to understand, but assessing its future performance requires a detailed look into a complicated and cyclical industry. Their revenue streams are quite complicated, as are their customer relationships, and therefore, understanding it requires lots of work and knowledge of these specialized markets.

Balance Sheet Health: 4 / 5

  • While not a perfect balance sheet, their financial standing is strong. Their debt has increased, but is at a manageable level. The equity and assets remain healthy and they’ve shown a capability to create high profits. Therefore, this score is given.

Their negative book value could be an issue if things worsen significantly, as they have very little net tangible assets on their balance sheet.