A small cap stock with supply chain issues worth buying

LCI Industries (ticker: LCII) saw its own margin fall from 8.6% to 7.6%. But those supply chain issues are easing and LCI, whose brands include Taylor Made boat parts and Thomas Payne RV furniture, is the primary beneficiary.

Management has taken steps to ensure margins recover, continuing to focus on selling parts to recreational vehicle and boat manufacturers to the more profitable aftermarket – selling aftermarket parts. .

As a result, the company, which has a market capitalization of $ 4 billion, could return to its previous levels of profitability. This could push the stock, which closed at a record $ 156.91 on Friday, to new highs.

It’s hard to overstate how hard LCI, also known as Lippert, has been affected by the shortages. Rising input costs reduced its gross margin by about five percentage points, which fell to 21.6% in the just-ended third quarter, from 26.8% in the same period of 2020 .

These problems are starting to ease, LCI management said in the company’s third quarter earnings call, and this has helped fourth quarter operating margins increase from one to 1.5. percentage point from third quarter levels. This is one of the reasons LCI stock has risen 10% since its November 2 earnings report.

LCI isn’t just counting on falling material costs and other slowly easing supply chain issues. It has bet big on the secondary market, which has always been a small part of its business, accounting for only 9.4% of total sales in 2018. In 2020, the number has risen to 22.5%, and it is only expected to than to increase.

Sales of new boats and motorhomes have increased during the pandemic, and a slowdown in the company’s original equipment business could hurt inventory.

At the same time, all of these new vehicles will need spare parts. “We are entering a time when more things will fail and need to be replaced,” said Daniel Moore, analyst at CJS Securities. “You should see really well [aftermarket] growth.

With a fifth of the company’s business currently coming from the aftermarket, LCI CFO Brian Hall wants to increase aftermarket sales share to 25% by 2023.

To spur this growth, Hall says, large distributors are beginning to take control of parts dealers. Smaller dealers usually order a single part at the request of a vehicle owner, but larger dealers buy different products – and more of them – to make them available to consumers at all times.

To expand its aftermarket offering, LCI acquired new businesses, such as CURT Group, a trailer hitch manufacturer it purchased for $ 340 million in 2019. Aftermarket operating margin of LCI reached 11.4% in the third quarter, compared to just 6.8%. for the rest of his activity.

Lower input costs and the continued expansion of aftermarket activities mean that LCI’s sales and profits could grow faster than currently anticipated. Analysts expect the company’s sales to rise 9% in 2022, to $ 4.8 billion, and earnings to rise 17%, to $ 12.69 per share.

Still, Rue expects LCI earnings to fall to $ 11.31 per share in 2023, a figure far too low if the company can hit $ 5 billion in sales that year, said Michael Swartz. , analyst at Truist Securities. With the company expected to increase its margins to something closer to 9%, earnings could reach $ 13 or more per share.

“[We] I think the worst is now behind LCI and we might actually see higher margins in the next few quarters, ”Swartz said. “We remain constructive on [long term] and I think sentiment should improve, given the more favorable cost / price momentum expected to unfold over the next few quarters. “

At 12.4 times the estimated 12-month earnings, lower than the five-year average of 15.2 times, LCI stock would be worth $ 161 a share, or 2.6% above Friday’s close. But a 14-fold increase would put the shares worth $ 182, up 16% from Friday’s close, according to CJS Securities’ Moore, although it may take a bit of patience before that happens. plays.

One advantage of LCI: Unlike many other small cap companies, it pays a dividend, which currently pays around 2.3%. So investors will be paid to wait.

Write to Jacob Sonenshine at [email protected]