To The Moon

$Atkore Inc.(ATKR)$

Atkore is a straightforward company that generates significant revenue by producing products that help organize and protect wires, cables, and pipes. However, its stock has dropped by 67% since March 2024, despite strong demand for its products. Let’s break down why this happened by going through a seven-step analysis, examining the company's financial situation, growth, dividends, and other key factors, before assessing its investment potential.

If you had invested $11,000 in Atkore 10 years ago, you would have purchased 63 shares. Today, those shares would be worth about $3,928, plus an additional $60 in dividends. The total value after factoring in the recent drop would be $3,988—a 298% gain over 10 years. Not bad for a company that focuses on cable management!

Earning Overview

Atkore Inc. reported its first-quarter fiscal year 2025 earnings on February 4, 2025. The company reported net sales of $662 million, a 17.1% decrease compared to the same quarter in the previous year. Adjusted EBITDA stood at $99 million, and the adjusted earnings per share (EPS) was $1.63.

The decline in net sales was primarily due to a 5% decrease in organic volume and a 12% reduction in average selling prices during the quarter. Additionally, the tax rate increased to 21% from 17.5% in the prior year.

Despite these challenges, Atkore remains committed to growth and shareholder returns. The company repurchased $50 million worth of shares in the first quarter and has revised its full-year 2025 adjusted EBITDA outlook to approximately $375 million to $425 million, reflecting a more challenging market environment than anticipated. In my opinion, this is waste of money repurchased at wrong timing like Dollar General Stock.

Fundamental Analysis

First, let's review Atkore's recent financial results. Revenue decreased by 9% year-over-year, net income dropped by 31.5%, cash reserves fell by 9.5%, and assets saw a slight increase of 0.3%. The stock dropped over 22% in a single day following these results. But let’s dive deeper into the fundamentals, as short-term results, market sentiment, and cyclicality might present potential opportunities for long-term investors.

When assessing Atkore's business fundamentals, there are some solid signs. Its return on invested capital (ROIC) is 13.6%, above the 10% benchmark. The company's net profit margin averages 17.3%, significantly higher than the sector median of 6.5%, showing strong pricing power. Additionally, Atkore has been aggressive with share buybacks, reducing its share count by 43% over the past decade, which is good for long-term investors. The company’s debt is manageable, with its free cash flow able to cover the long-term debt in less than two years.

In terms of growth, revenue growth is a bit underwhelming at a 6.5% 10-year compound annual growth rate (CAGR), which is lower than desired. However, free cash flow growth is impressive at 19.2% over the same period, and earnings per share have grown by 38% since 2016, although earlier losses make calculating a 10-year figure difficult. While the company's growth potential is there, it’s important to note that it operates in a cyclical industry, which means its results can fluctuate with broader economic trends.

Atkore reported net sales of $662 million and adjusted EBITDA of $99 million, both meeting expectations within the anticipated outlook range. The company repurchased $50 million worth of shares during Q1, reinforcing its commitment to returning capital to shareholders.

Atkore released its fiscal year 2024 sustainability report, showcasing progress toward 2025 goals and additional environmental product declarations. The company remains on track with its growth initiatives in water and global construction services, which are expected to support product lines later in the year.

Operational improvements were observed at key facilities, such as the Hobart, Indiana site, contributing to stronger performance in the S&I segment.

Guidance

Atkore Inc. has provided updated financial guidance for the second quarter and full year of fiscal 2025. For Q2 2025, the company anticipates earnings per share (EPS) between $1.30 and $1.50, with revenue projected between $685 million and $715 million. This outlook reflects a more challenging market environment than previously expected.

Organic volume fell by 5% in Q1, largely due to strong prior-year performance and heightened competition. The company faces challenges from both domestic and international competition, particularly impacting the PVC Conduit and Steel Conduit segments. Increased imports of PVC Conduit and Steel Conduit have created pricing pressure and shifted market dynamics.

Adjusted EBITDA margins in the electrical segment were compressed due to declines in pricing and volume. Atkore revised its full-year 2025 adjusted EBITDA guidance to a range of $375 million to $425 million, reflecting a more challenging market environment than initially expected.

Free Cash Flow

Atkore's fiscal year aligns with the calendar year, concluding on December 31. As of February 17, 2025, the company has not yet released its financial results for the first quarter of 2025. The most recent available data is for the fourth quarter of 2023, which ended on September 30, 2023. In that quarter, Atkore reported a free cash flow of $588.7 million.

Dividend

On the dividend front, the yield is 2%, with an 8% payout ratio, which is safe but on the lower side. The company just began paying dividends in 2024, so there’s no growth history to analyze, but they do plan to distribute $1 million in dividends in the next quarter.

Technical Analysis

Support Levels:

$62: This level has been identified as a support point, indicating potential price stability if the stock declines to this range.

Resistance Levels:

$81.50: This price point is noted as a resistance level, where the stock may encounter selling pressure if it rises to this level.

Risks and Challenges

Raw Material Price Fluctuations: Atkore is highly dependent on the prices of materials like steel and PVC. Any significant increases in these costs can put pressure on profit margins, as the company may not be able to fully pass on these costs to customers.

Increased Competition: The company faces rising competition, both domestically and internationally, particularly from lower-quality imports. This competition is affecting the PVC Conduit and Steel Conduit markets, potentially driving down prices and reducing market share.

Market Cyclicality: Atkore operates in a cyclical industry, with demand for its products influenced by broader economic conditions and the construction sector. Economic downturns or slower growth in construction activity can negatively impact sales.

Pricing Pressures: The company has had to lower its selling prices in response to raw material price reductions and competitive pressures. This has resulted in decreased profitability, especially in its electrical segment, where both pricing and volume have been under pressure.

Supply Chain Disruptions: Like many manufacturers, Atkore is vulnerable to potential supply chain disruptions, which can delay production and impact costs. Issues like labor shortages, geopolitical tensions, or transportation bottlenecks could negatively affect the company’s ability to meet demand.

Changing Regulations: Atkore’s business is subject to various environmental and regulatory standards. Stricter regulations, particularly regarding environmental sustainability and product certifications, could result in higher compliance costs or necessitate changes in production processes.

Foreign Exchange Risks: As Atkore expands globally, fluctuations in foreign exchange rates can impact its international revenues and profits, especially in regions where it has significant exposure to currency volatility.

Interest Rate Sensitivity: Rising interest rates could impact the cost of debt for Atkore, increasing interest expenses and possibly affecting its cash flow and investment plans.

Valuation

Next, let's assess Atkore's valuation. With a price-to-earnings (P/E) ratio of just 6, it's trading at a bargain price, especially since it appears on the Magic Formula list for value investing. Using a discounted cash flow (DCF) analysis, we estimated the company's intrinsic value. In a low-growth scenario, the intrinsic value is $28, in a medium-growth scenario, it's $143, and in a high-growth scenario, it’s $167. After applying a 30% margin of safety, the range comes out to $89 to $117, while the current price is around $62. This suggests that Atkore is attractively priced.

Market sentiment

Now, let's look at ownership. Individual insiders own just 0.9% of the company, a low figure compared to the desired 2%. Additionally, there has been a trend of sales, rather than purchases, by insiders in recent quarters. Super investors, like Lee Einsley, have also been selling shares. This suggests that insiders and top investors are somewhat cautious, mirroring market sentiment.

However, to understand the stock's 67% decline, we must consider the broader context. Atkore's business is heavily influenced by raw material prices, such as steel. As these prices dropped, Atkore had to lower its selling prices as well. This caused operating income to fall from $1.2 billion in 2022 to $0.6 billion in 2024. Another challenge is the growing competition from lower-quality steel and PVC imports. Despite this, the company saw sales volume grow by 3.2% in 2023 and 3.5% in 2024, showing consistent growth in its core business.

Conclusion

So, while Atkore is facing headwinds like falling material prices and rising competition, its sales volume is still growing. Given the company’s solid financial health and growth potential, the recent stock drop may present an interesting opportunity, especially since the fundamentals haven’t deteriorated as much as the stock price suggests. The stock might continue to face some challenges, but it could be a good investment for those looking at the long-term potential.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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