Sell Patrick Industries

May 09, 2022 6:17 PM ETPatrick Industries, Inc. (PATK)5 Comments1 Like

Summary

  • PATK's quarterly revenue spiked on higher RV sales and acquisitions.
  • Broader markets are declining as the Fed removes the punch bowl. PATK is down over 30% Y/Y and I expect further declines.
  • PATK's organic revenue and earnings will likely fall as the economy slows. Sell PATK.
  • This idea was discussed in more depth with members of my private investing community, Shocking The Street. Learn More »
Motor home and sunset

Marc Dufresne/E+ via Getty Images

The Federal Reserve recently raised interest rates 50 basis points in order to bring short-term rates closer to normalized levels. The Fed expects to unwind its balance sheet next month. This all comes as Q1 GDP contracted 1.4%. A less lenient Fed will likely not help economic growth in the short-term. In fact, the Fed is trying to tamp down inflationary pressures. This does not bode well for the cyclical recreational vehicle ("RV") industry and Patrick Industries (NASDAQ:PATK), which generates the lion's share of its revenue from RVs.

In its most recent quarter Patrick reported revenue of $1.3 billion, up 58% Y/Y. Revenue growth Q/Q was 17%. Sequential growth could drive sentiment for the stock going forward; it could be the first signal that the red-hot RV industry could finally take a breather.

Patrick revenue growth

Shock Exchange

Each of the company's major product segments reported strong revenue growth. Revenue for the RV segment was $821 million, up 64% Y/Y. The RV segment has remained red hot, which has inured to the benefit of Patrick. RV revenue represented 61% of total revenue, up from 59% in the year-earlier period. The industry has benefited from secular trends as families continue to demonstrate demand for camping and boating activities.

RV shipments for the entire industry were over 64,000 in March, up 19% Y/Y. For Q1 RV shipments were up 15% Y/Y. Patrick's RV-related revenue grew 22% sequentially, which was still solid. If its sequential revenue growth begins to stall then it could be a bearish signal for the company.

Revenue for the Marine segment was $221 million, up 62% Y/Y and up 17% Q/Q. Unit shipments for the wholesale powerboat industry were flat. The Marine segment was about to increase content per wholesale powerboat unit, which allowed the segment's revenue to spike. Manufactured Housing and Industrial reported combined revenue of $301 million, up 42% Y/Y and up 5% Q/Q. The company's content per wholesale Manufactured Housing unit increased in the double-digit percentage range, which helped drive the segment's revenue higher. At the Federal removes the punch bowl, combined revenue for Manufactured Housing and Industrial could stall in the second half of the year.

Margins Continued To Improve

One would expect that as Patrick's revenue spiked, it should have benefited from economies of scale, leading to margin improvement. Patrick may look to contain costs to offset any potential slow down in revenue. During the quarter gross margin was 22%, up 300 basis points versus the year-earlier period. According to management, the company achieved production and labor efficiencies, which help drive gross margin improvement:

Gross margin in the first quarter was 22%, increasing 300 basis points compared to the prior year quarter, driven primarily by contributions of our fiscal year 2021 acquisitions, a realization of production and labor efficiencies, and higher production volumes, partially offset by the continued pressure of raw material pricing environment and inbound freight costs.

Warehouse and delivery costs were $41 million, up 38% Y/Y. However, as a percentage of revenue, warehouse and delivery costs were 3.1%, down 40 basis points versus that of the year-earlier period. SG&A costs were $76 million, up 47% Y/Y. On a combined basis, warehouse and delivery costs, and SG&A expenses were about 8.7%, down 80 basis points versus that of the year-earlier period. The fallout was that EBITDA of $192 million more than doubled versus that of the year-earlier period. EBITDA margin was 14.3%, up 140 basis points versus that of the year-earlier period.

Rapid revenue growth and margin improvement created a double-positive for EBITDA. Whether Patrick can keep it up remains to be seen. The company spent over $120 million on business acquisitions and other investing during the quarter, yet management was been able to integrate those acquisitions and maintain margins. I anticipate more acquisitions and additional cost containment efforts to help drive margins higher. If Patrick cannot convince investors it can deliver organic revenue and earnings growth then the PATK could face headwinds.

Patrick's Acquisition Strategy Could Face Scrutiny

Patrick has $64 million in cash, down from $123 million at year end; acquisitions helped drive cash lower. The company has working capital of $678 million, up from $541 million at year end. Robust working capital and liquidity is important for a cyclical business in an uncertain economy. Free cash flow ("FCF") was -$42 million, down from $36 million in the year-earlier period. Patrick will likely continue to burn cash as long as the company grows. Such growth would require the company to fund working capital to support the business.

PATK has an enterprise value of $3.0 billion and trades at 5.2x last 12 months ("LTM") EBITDA. The stock trades at a discount to my estimate of 8x to 10x EBITDA. However, PATK is down about 33% Y/Y and broader markets are declining as the Federal Reserve is hiking interest rates and planning to reduce its balance sheet starting next month. The decline in broader markets has created headwinds for PATK. Investors cannot longer blindly buy stocks and expect them to rise. I expect broader markets to slide lower, which could (1) cause investors to scrutinize Patrick's organic earnings growth or (2) call into question the carrying value of the company's $1.3 billion goodwill/intangible balance related to prior acquisitions.

Conclusion

PATK will likely fall with broader markets. Sell the stock.

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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.

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