Value Find: Patrick Industries
Sizeable insider buying by a smart money hedge fund and a beaten-down stock price make Patrick Industries, Inc. (Nasdaq:PATK) a small-cap play worth putting on the radar.
Billionaire investor Jeffrey Gendell has made his fortune patiently making big bets in sectors when they are out of favor. As part of this strategy, his Tontine Capital hedge fund selectively invests in the private placements of small-cap companies. Tontine-led private placement homeruns in recent years have included Broadwind Energy, Inc. (OTCBB:BWEN), MISCOR Group Ltd. (OTCBB:MIGL), Exide Technologies (Nasdaq:XIDE) and Matrix Service Co. (Nasdaq:MTRX). Given this record, Tontine’s recent increased bet on Patrick Industries, a manufacturer of component products and a distributor of building products serving the recreational vehicle (RV), manufactured housing and industrial markets, caught my eye.
Near the end of June, Patrick completed a previously announced Tontine-led rights offering and standby purchase agreement at a price of $7 a share. In total, the rights offering and standby purchase agreement raised gross proceeds of nearly $13 million. Since the start of 2008, Tontine has now pumped nearly $20 million in cash into Patrick, boosting its stake in the $67 million market capitalization company to 57%. This continued vote of confidence by Tontine in Patrick comes in the face of the company’s stock having been walloped over the past year. At Monday’s closing price of $7.30, Patrick shares have tumbled over 50% from the $17 they fetched last July.
In May 2007, Elkhart, Ind.-based Patrick acquired rival Adorn, a manufacturer and supplier of interior components to the RV and manufactured housing industries, for nearly $79 million in cash. This acquisition virtually doubled Patrick’s manufacturing sales volume and significantly increased its market share. Since closing the Adorn deal, Patrick has focused on consolidating overlapping facilities to boost capacity utilization and improve operating efficiencies. This integration activity has come at a dicey time for Patrick with the housing industry in a downturn and RV sales suffering from high gas prices and weakened consumer confidence.
Shareholders have exited Patrick’s stock as its results have suffered. For the first quarter ended March 30, Patrick reported revenue of $111 million and a loss of $1.4 million, or $0.22 a share. This compares with a loss of $0.7 million, or $0.13 a share, in the year ago period. The first-quarter loss includes $0.8 million worth of expenses that Patrick indicates are one-time items. The manufactured home and RV sectors represented 33% and 42% of Patrick’s total sales, respectively, for the quarter. The remaining 25% of its revenue is from industrial markets, which include sales to the kitchen cabinet, office furniture, store fixtures and related industries.
For full-year 2007, Patrick reported total revenue of $435.2 million and a loss of $5.8 million, or $1.05 a share. This compared with revenue of $347.6 million and a profit of $2.7 million, or $0.53 a share, for 2006. While Patrick is certainly losing money amidst a downturn in its end markets, the actual loss may not be as bad as it looks. The 2007 reported loss included one-time expenses of $0.77 a share after tax and acquisition-related amortization of $0.15 a share after tax.
Tontine Capital first became a large investor in Patrick in 2005 when it paid almost $10 a share to buy out Patrick founder Mervin Lung’s sizeable minority stake. Tontine then helped support the Adorn acquisition last year by providing a combination of interim debt financing and an equity investment at $11.25 a share. So far, Patrick has clearly been a loser for Tontine. This being said, Tontine wouldn’t continue to pump more capital into Patrick unless it thinks there is a big payoff down the line. Patrick has said that it expects to explore new strategic and accretive acquisition opportunities during the second half of the year. With Tontine’s bankroll behind Patrick, the small-cap company could turn into a vehicle for rolling-up hobbled competitors.
At a current enterprise value of approximately $127 million, the market is valuing Patrick at just 0.3 times last year’s revenue. Even for a lower-margin business like Patrick, this valuation looks inexpensive if Patrick’s end markets settle out and it can start dropping more to the bottom line.
Even after the stock’s beating, Patrick is a medium-to-higher risk play. A further spike in oil prices and a sharper economic downturn would certainly be bad news for Patrick. The stock is illiquid, trading less than 6,000 shares on average a day, so it isn’t easy to get in and out. This being said, having been founded in 1959, this is not the first time that Patrick has faced down cycles. Tontine isn’t infallible, but its contrarian stance often pays off quite well over time.
Bottom-line, Patrick looks like an intriguing small-cap play at or below the $6.50 level.
About the Author
Contributing author Matt Ragas is an investment writer and analyst with ten years of experience analyzing small and microcap stocks, with a particular emphasis on value and turnaround situations.
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