- The stock has performed well over the last six months, and I will provide an update to the financial performance.
- Residential growth has outperformed expectations and signals for a long-term bullish trend.
- While the stock has increased by 150%+ since my last article, I do not believe it is overvalued, and I will create new price expectations.
- I remain confident in the company’s future potential as the pandemic ends and growth continues.
Solid 2020 Has Boosted Investor Confidence Despite Commercial Headwinds
When I released my first article on Tecnoglass, Inc. (NYSE:TGLS) in September, the company had a share price of $5.50. Now, it is nearly 150% higher to over $13.50 in just half a year. This is due to a combination of bringing TGLS back up to a fair valuation and investor confidence in the company's growth potential. Further, investors are confident in the considerable increase of revenues in the US residential window segment. Homebuilding has remained strong throughout the pandemic, and Tecnoglass has been able to expand into that market. The commercial market has taken a hit, but a turnaround is already occurring which will allow revenues to reach previous levels by the end of the year. However, the most important indicator from the year is that single-family revenues accounted for 21% of total sales compared to 18% in 2019 and 3% in 2017.
While US sales performance has been quick to recover, the company is only now seeing recovery in Colombia and other Latin American markets. However, the uptake in sales in that region will help drive revenues up slightly as they are still typically between 10% and 15% of total revenues. This is important to note, because if you look at the revenue growth of a competitor like PGT Innovations (PGTI), then it would seem that Tecnoglass is underperforming. Yet, this is only due to the wider range of markets that Tecnoglass penetrates, with commercial sales returning to past levels. However, Tecnoglass has been able to maneuver well during the pandemic, with impressive financial accomplishments for the year.
One of the successful strategies for the company over the past year is the reduction of manufacturing costs and increasing gross profit due to the technological update of its factories. This, combined with a restructuring of debt to lower rates, has led to a conservative leverage profile of 1.6x, as US and European lenders look favorably upon the company. While 2020 saw a large drop in the share price due to reduction in the dividend, the company still commits to returning a smaller portion of capital to shareholders while remaining focused on growth and expansion. That is why you see the rapid increase in share price during 2021, which has now surpassed prices not seen for 3-5 years.
The company still expects strong tailwinds in regards to the residential housing market for 2021, and so it will continue to focus on residential market share expansion. This includes its introduction of a Multimax product line that is targeted to large-scale or multifamily homebuilders rather than single-family units and will create revenues by the second half of the year. Tie this in with expanded dealer networks in other southern states, the company has numerous positive catalysts moving forward. As such, I need to revise my previous share price forecasts, and I will use updated financial information to do so.
Image 1: Company provided slide showcasing the end of the fiscal year.
As Price Approaches My Former Five-Year Expectation, Where Can it Go From Here?
In order to understand whether the estimations made in my previous article are valid or not, I will now compare the fundamental values of the company from then to now. First, I estimated that revenue growth would average 12% per year over the next five-year span, but I believe that with its successful growth in the US residential market, this value can be beaten. Therefore, I will increase my revenue growth estimate to 15% to account for this. Second, I did not incorporate a significant change in valuation for the company, using only a 40% increase in P/S from 0.67x TTM ratio to 0.938x. I now realize that this is far too undervalued for such a fundamentally stable company like this, with investors currently supporting a valuation of 1.55 at $13.49 per share. This valuation is 2.3x where it was at six months ago and is also tied in with high expectations of growth for the homebuilding market as a whole. To note, 1.55 is still below the sector average of 1.66 and can account for at least 10% or more increase in value to accommodate the growth potential and increased profitability. Therefore, at a 15% CAGR growth rate over the next five years, the share price should healthily reach a price target of $27.00 per share at the current undervaluation, or $29.10 with a 10% increase in value.
While this is an exciting new development that highlights increased market confidence in Tecnoglass, I also find that even more share growth may be possible. To point, if we look at the current GAAP TTM P/E ratio, you can see that the company is 26% below the sector average, at 24.08. Non-GAAP and FWD P/E ratios are even more underrated, with values being 36-47% below sector medians. This is quite incredible as the company sees higher-than-average profitability with the gross profit margin and net income margin increasing 29.4% and 61% on average compared to peers. Thus when combining these two factors, you can conservatively estimate that the valuation of the company still has a significant way to travel, up to 30% I believe. Especially when considering that the FWD GAAP P/E is only 13.10, or 47% below average. If the company continues to grow off of the US residential market and then see a resurgence in the commercial market, then I find that this valuation will not last for long.
With the current market climate, I would not be surprised if the value of the company increases 1.25x by the end of the year to reach the level of its peers. When combined with 15% growth, this will provide me with a one-year price target of $19.40. This will correspond with an appreciation of 43% within one year, or until the shares reach this seemingly fair valuation of 1.25x current value. For a conservative growth scenario of 9%, as provided in company guidance, the share price has still has a potential to reach $18.40, or a 36% increase over the year. As such, Tecnoglass continues to be an incredible investment, and I am sorry to have underestimated this potential gain previously.
Image 2: Company slide of what I deem conservative values, with the current state of the homebuilding market in the US, I am sure that the company will be able to beat these expectations.
Conclusion and Assessment of Risk
While we now have positive expectations of the potential that lies within this company, let us take a moment to become accustomed with potential hindrances to this growth. First lies upon the reliance on the US residential market that the company is only now penetrating. Although incredible growth has been seen in the homebuilding market over the past year, as seen with the 121% increase in the SPDR Homebuilders ETF (XHB) to all new highs, the major commercial market that Tecnoglass is familiar with is still slow to recover. However, it may be safe to say that growth is unlikely to fall to lower levels in this market, and only the timeline of an increase in growth is up for debate. Though keep in mind that there is cyclicality to the industry and that growth will ebb and flow over time. Although, the risk is reduced now due to reduced and restructured debt, leading to an ability to not be burdened during a new potential downturn in the industry. The strong company fundamentals will provide a solid platform to adjust to additional market headwinds into the future.
Another point of risk lies in the company being foreign-based, with potential instability or volatility due to events that occur in the country. However, as I covered before, Colombia is well regarded for being fiscally conservative and having an ever increasing beneficial environment for companies to succeed. Another potential risk of being based across the Caribbean is due to the heavily disrupted shipping industry, with numerous shortages of containers and increasing prices around the world. However, this point was addressed in its most recent earnings call, and the company sees no risk due to the fact its own vertical integration bolstering the ability to provide its own distribution. This keeps costs down due to not relying on other companies for the majority of the supply chain. Further, due to the surplus of goods being brought from the US to Colombia, there is much needed room on ships for Colombian exports. Therefore, shipping and distribution to the US should not be an issue. I would also recommend reading the transcript, as the management does well to quell numerous concerns over costs, capital expenditure, and profitability.
All in all, I have high hopes for the short-term potential of the company, and I remain very bullish even with the large run-up over the past four months.
Thanks for reading and please feel free to leave your thoughts down below.
This article was written by
Analyst’s Disclosure: I am/we are long TGLS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.