August 27, 2023
I first wrote about Atlas Engineered Products (APEUF) on December 11, 2022, here: https://boolefund.com/case-study-atlas-engineered-products-apeuf/
Since then, the stock has increased 63%, from $0.54 to $0.88. However, the stock is still undervalued and it seems to have a sustainably high ROE (return on equity) of between 26% and 40%, which should allow the business and the stock to compound over time.
Atlas Engineered Products is a leading Canadian manufacturer of engineered wood products, including roof systems and roof trusses, floor systems and floor trusses, and wall panels.
Atlas’s specialist design team uses cutting edge design and engineering technology to ensure that their clients get consistent, accurate, top-quality products.
Atlas has acquired and improved 8 companies since going public in late 2017.
The market for roof systems and trusses, floor systems and trusses, and wall panels, is local because it is too expensive to transport such large items over a long distance. As a result, this market is extremely fragmented. There are hundreds of small regional operators with sales in the range of $3 to $15 million. Many of these operators need succession planning. Atlas thus has an opportunity to continue making acquisitions.
Atlas is providing an opportunity for many of these small operators for succession planning purposes.
At the same time, Atlas can profit from operational efficiences, technological advances, advantages of scale in procurement, and expanded product distribution. (Most small regional operators are unable or unwilling to invest in technology and automation.)
Atlas focuses on the higher added value and most scalable products. It quickly winds down or sells lower margin businesses.
The company aims to sell all of its products at all of its locations. In addition to the core product offering, Atlas is focused on complementary product lines chiefly related to engineered wood. The company also has an ongoing program of equipment upgrade and automation at all of its locations. Moreover, Atlas continues to expand its sales team.
Here is the company’s most recent investor presentation: https://www.atlasengineeredproducts.com/dist/assets/presentation/Investor-Deck-May-2023-Rev-2.3.8-compressed.pdf
Clients choose Atlas Engineered Products:
- To save money: Atlas is cost effective and efficient, with national buying power and best-in-class design, production, and automation technology.
- To save time: Offsite customized manufactured roof and floor trusses, and wall panels, can be installed onsite up to 5x’s faster than traditional stick frame construction.
- For expanded product offerings: Roof, wall, and floor systems, and engineered wood products, offers customers a one-stop product delivery.
- Atlas is environmentally friendly: it uses less energy to manufacture, and has fewer emissions and waste.
Here are the current multiples:
- EV/EBITDA = 3.49
- P/E = 9.16
- P/B = 2.33
- P/CF = 3.99
- P/S = 1.24
Insider ownership is 18.7%, which is very good. TL/TA (total liabilities/total assets) is 41.5%, which is decent.
ROE is 26%, which is quite good. Normalized ROE is likely higher, although ROE would temporarily dip during a recession or slowdown (but Atlas would probably then have more good acquisition opportunities).
Over the longer term, demographics are a tailwind, as the Canadian government plans to admit 500,000 immigrants per year by 2025.
The Piotroski F_score is 7, which is good.
Intrinsic value scenarios:
- Low case: During a recession and/or a bear market, the stock could fall 50% from $0.88 to $0.44.
- Mid case: The current EV/EBITDA is 3.49, but in a normal environment it should be at least 6.0. That would mean the stock is worth $1.52, which is 72% above today’s $0.88.
- High case: If the company can maintain its ROE of between 26% and 40%, while reinvesting most of its profits into both inorganic and organic growth, then Atlas’ profits and stock could continue to compound at a high rate over time.
The housing market is cyclical. Economies are slowing down as interest rates rise. There will likely be a recession (which would slow down organic growth but increase acquisitions) and/or a bear market.
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