Keystone is a well respected firm that analyzes over 3000 companies per year and only selects 6 - 10 for purchase by their clients. So notwithstanding some of the near term issues, the fact that they like the business and the long term potential is a very positive sign. GLTA What does Atlas do?
Atlas Engineered Products designs manufactures and sells engineered roof trusses, floor trusses, and wall panels. The company also distributes a range of various engineered wood products for use by builders of residential and commercial wood-framed buildings. These include single family homes, townhouses, multi-story wood-framed residential buildings, commercial buildings, and agricultural structures.
The company’s strategy is focused on profitability and organic revenue growth within its current markets and Atlas is an active industry consolidator, having expanded inorganically to eight locations from one in 2017.
Atlas is a company we like, do not own right now, but continue to monitor it. We MONITOR hundreds of companies, so this does not mean we will buy, but is meets enough of our criteria to be interesting.
YTD Stock Performance.
While the stock is up around 9% on the year, it is down 28% of its year highs – let’s take a look under the hood on the most recent quarter.
Q3 2024 Highlights.
Revenue of rose 16.2% to $16.5 million from $14.36 million in Q3 2023.
Adjusted EBITDA of $3.05 million, represented an increase of 3% year-over-year.
Net income after taxes was $914,458 or $0.01 per share in Q3 2024 compared to net income after taxes of $1.3 million or $0.02 per share for the three months ended September 30, 2023.
Let’s examine the numbers a bit closer.
Revenue Growth:
15.2% Q3 Growth: Powered by acquisitions (organically revenues was down 6.3% Y/Y) and growth related to engineered wood products and walls. Atlas’s push into wall panels was on display in the quarter, with the product line up 119.0% Y/Y, representing 11.5% of total sales from 6.2% in the prior period – while it was expected, we note that the negative organic growth continues to show softness in end market.
Underperformance in Adj. EBITDA relative to revenue growth:
due to the tougher market conditions that led to Management sacrificing margins for volumes – a theme Management called out on its Q2 conference call. More specifically, Q3 housing starts were down 6.2%, and two of AEP’s key provincial end markets, ON and BC, underperformed dropping 17.8% and 8.4%, respectively.
Valuations:
High valuations based on expected 2024 earnings which are down year over year.
There is an expectation of a jump in 2025 – market dependent and we continues to see a general slowdown in Canada, so this would have to be second half weighted – even on this, at over 23 times next years expected EPS, the stock is not cheap near-term given the volatility and uncertainty near-term in the contruction market – the housing shortage should provide a ready market longer term, but we may find a more attractive entry point before this.
EV/EBITDA (TTM): 8.99.
EV/EBITDA (2024e): 10.97.
EV/EBITDA (2025e): 7.57.
Looks better, but just fair given the uncertainty.
Positives.
Recent rate cuts – quoting activity increases, which should translate into sales in 4-6 months, indicating potential a return to growth in 2025.
Gross margins could revert to Atlas’s more normal 27-30% range from less than 25% by the second half of 2025.
A growing housing shortage in Canada.
An accretive M&A pipeline that continues to build.
Conclusion
We like the business and the longer-term consolidation potential – we do note that consolidators walk a very tricky line – many can acquire, but to grow Cash flow or earnings on a per share basis is difficult as the share counts can rise over time to fudn revenue growth – we will monitor this.
Good long-term growth – but it has levelled and declined near-term:
Near-term – Note: Near-term delay in the LCF and Hi-Tec robotics initiative (estimate for revenue generation pushed back to Q3/26).