IPO Preview: Ply Gem Holdings

| About: Ply Gem (PGEM)

Based in Cary, NC, Ply Gem Holdings (NYSE:PGEM) scheduled a $300 million IPO with a market capitalization of $1.23 billion at a price range mid-point of $19 for Thursday, May 23, 2013.

Five other new IPOs are scheduled for IPOs for this week. The full IPO calendar is here.

  • S-1 filed May 13, 2013
  • Manager, Joint Managers: J.P. Morgan; Credit Suisse; Goldman; UBS; Deutsche
  • Co-Managers: Zelman Partners; BB&T Capital; Stephens

PGEM is a leading manufacturer of exterior building products in North America. PGEM is trying to ride the current wave of enthusiasm for homebuilding stocks, which has been going on for a year and a half. However, PGEM has an accumulated deficit, $780 million, a negative net worth of $128 million post IPO, and $856 million in debt.

PGEM has never shown a recent profit. And it recently acquired two Canadian companies with $236 million in 2012 revenue that lost $3 million in 2012. On a combined basis (including the recent acquisitions), PGEM generated $1.3 billion in revenue and showed a $42 million loss for 2012.

Yes, there is demand for the stock because of exposure to the homebuilding market, but there's no proof that PGEM management can make money in its very competitive industry. PGEM itself has no marketing or sales levers to generate top line revenue growth. It just has to go with the flow and it has to cover a lot of ground just to get to breakeven.

Plus, there's no way it can pay down its $856 million in debt from operations. So at some point after the IPO it can be expected to dilute the stock by selling more stock to raise money to pay down debt.

Valuation Ratios

IPO Mrkt

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2012 year (1st qtr always low)

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in IPO

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Adjusted 2012 for recent acq.




Quanex Building Products (NYSE:NX)






2012 because the business is seasonal

Boise Cascade (NYSE:BCC)







PGEM is priced in the same approximate range as competitor NX. Although recent IPO BCC is not a direct competitor, the comparative valuations are shown as a 'sanity' check. NX has been in a slight uptrend the past month, which is a positive for PGEM.

In spite of PGEM's poor financial results, PGEM is a speculative buy on the IPO based on the overall market and current investor interest in the homebuilding market segment, regardless of the underlying financials.

PGEM is leading manufacturer of exterior building products in North America, operating in two reportable segments: (I) Siding, Fencing and Stone and (ii) Windows and Doors, which comprised 59% and 41% of sales, respectively, for the fiscal year ended December 31, 2012 and 54% and 46% of sales, respectively, for the three months ended March 30, 2013.

These two segments produce a comprehensive product line of vinyl siding, designer accents, cellular PVC trim, vinyl fencing, vinyl and composite railing, stone veneer and vinyl windows and doors used in both the new construction market and the home repair and remodeling market in the United States and Western Canada.

PGEM's vinyl building products have the leading share of sales volume in siding and windows in the United States. PGEM also makes vinyl and aluminum soffit and siding accessories, aluminum trim coil, wood windows, aluminum windows, vinyl and aluminum-clad windows and steel and fiberglass doors, enabling us to bundle complementary and color-matched products and accessories with core products.

Ply Gem Holdings was incorporated on January 23, 2004 by affiliates of CI Capital Partners for the purpose of acquiring Ply Gem Industries from Nortek, Inc. ("Nortek").

The Ply Gem acquisition was completed on February 12, 2004 for a purchase price, net of cash acquired, of $556.6 million. Prior to the Ply Gem acquisition, the business was known as the Windows, Doors and Siding division of Nortek, where the business operated as a holding company with a broad set of brands.

Since the Ply Gem acquisition, PGEM has acquired seven additional businesses, and entered into an agreement to acquire one additional business, to complement and expand the product portfolio and geographical diversity.

PGEM believes it has established leading positions in many of core product categories including: No. 1 in vinyl siding in the U.S.; No. 1 in aluminum accessories in the U.S.; No. 2 in vinyl and aluminum windows in the U.S.; No. 1 in windows and doors in Western Canada; and a leading position in vinyl siding and accessories in Canada.

PGEM has a multi-channel distribution network that serves both the new construction and home repair and remodeling end markets through a broad customer base of specialty and wholesale distributors, retail home centers, lumberyards, remodeling dealers and builders.

PGEM's top ten customers accounted for 45.9% of net sales in 2012. The largest customer for the fiscal year ended December 31, 2012, ABC Supply Co., Inc., distributes PGEM's products within its building products distribution business, and accounted for 10.5% of consolidated 2012 net sales. PGEM expects a small number of customers to continue to account for a substantial portion of net sales for the foreseeable future.

On April 9, 2013, PGEM acquired all of the capital stock of Gienow, a manufacturer of windows and doors in Western Canada, for consideration of CAD $21.0 million. For the year ended December 31, 2012, Gienow had total net sales of CAD $102.1 million and a net loss of CAD $2.5 million.

On May 6, 2013, PGEM entered into a share purchase agreement to acquire all of the issued and outstanding capital stock of Mitten, a leading manufacturer of vinyl siding and accessories in Canada, for consideration of CAD $82.0 million, subject to certain purchase price adjustments. PGEM intends to use a portion of the net proceeds from this IPO to pay the aggregate purchase price. For the year ended December 31, 2012, Mitten had net sales of CAD $133.7 million and a net loss of CAD $0.3 million.

The demand for the PGEM's products is seasonal, particularly in the Northeast and Midwest regions of the United States and Western Canada where inclement weather during the winter months usually reduces the level of building and remodeling activity in both the home repair and remodeling and new home construction sectors. PGEM's sales are usually lower during the first and fourth quarters.

PGEM's principal raw materials, PVC resin and aluminum, have been subject to rapid price changes in the past. While PGEM has historically been able to substantially pass on significant PVC resin and aluminum cost increases through price increases to customers, financial results of operations for individual quarters can be and have been hurt by a delay between the time of PVC resin and aluminum cost increases and price increases in the products.

While PGEM expects that any significant future PVC resin and aluminum cost increases will be offset in part or whole over time by price increases to customers, PGEM may not be able to pass on any future price increases.

PGEM competes with other national and regional manufacturers of exterior building products.

Additionally, PGEM products face competition from alternative materials, such as wood, metal, fiber cement and masonry in siding, and wood in windows.

Closest Public Comparables

Quanex Building Products Corporation had a bad March quarter, which is not a good sign for PGEM. Quanex Building Products manufactures engineered materials, components and systems primarily for window and door original equipment manufacturers (OEMs). It reports operations in two segments: (1) Engineered Products, which makes window and door components and other residential building products for OEMs, that primarily serve the residential construction and remodeling markets; (2) Aluminum Sheet Products, which are used in exterior housing trim, fascias, roof edgings, soffits, downspouts and gutters.

Boise Cascade IPO'd February 5, 2013 at $21 and recently traded at $29.53. BCC, a North American wood products manufacturer and building materials distributor, is not a direct competitor but is in the same broadly defined category.

No dividends

Caxton-Iseman (Ply Gem), L.P. 20.5%

Caxton-Iseman (Ply Gem) II, L.P., 73.2%

PGEM expects to net $277 million from its IPO.

Proceeds are allocated as follows: $185 to repay debt and transaction fees, $82 million for general corporate purposes, including the acquisition of Mitten.

Disclaimer: This PGEM IPO report is based on a reading and analysis of PGEM's S-1A filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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