As a leader in the wild world of flexible metal hoses and piping, Omega Flex (OFLX -1.09%) may not jump out at investors as a stock screaming "multibagger potential." Nevertheless, since its initial public offering in 2005, Omega Flex has proven to be a quiet multibagger, delivering total returns above 800% -- a 13% annualized rate.
Despite this incredible run, no Wall Street analysts actively follow the stock, leaving the $700 million business somewhat unknown.
However, with its share price now down over 45% from its 52-week highs due to the ongoing softness in the United States housing industry, Omega Flex is quickly becoming one of my favorite dividend stocks to buy in 2024.
Omega Flex leads the flexible metal hoses and piping niche
Operating in the highly fragmented flexible metal hose industry, Omega Flex focuses on three market categories for the bulk of its sales:
- Residential and commercial construction: TracPipe, CounterStrike, and AutoSnap brands are used for piping fuel gases typically used by appliances.
- General industrial: DoubleTrac (double containment) and DEF-Trac (diesel emissions fluid) brands are used at locations like fueling stations and waste treatment plants while also serving various automotive and marina customers.
- Medical: MediTrac corrugated medical tubing moves medical gases safely throughout healthcare facilities.
While it is tough to pinpoint a "leader" in a niche category as specific as flexible metal hoses, Omega Flex believes itself to be the top dog (or near) in its residential, commercial, and industrial end markets. Meanwhile, its fledgling (2018 launch) medical unit has seen a rapid uptake -- even being used at temporary hospitals in Central Park during the pandemic.
That's great, you may be thinking, but what makes Omega Flex the better option?
Simply put, the company's 123 patents focus on flexibility and ease of installation and represent a massive upgrade over traditional, rigid piping. Not only is traditional piping more labor-intensive to install -- and far less user-friendly being inflexible -- but it also dramatically underperforms compared to Omega Flex's options in the event of an earthquake or lightning strike.
Despite these promising factors, the company saw sales and earnings per share (EPS) decline by 13% and 15% in the third quarter as the U.S. housing market continued to see fewer new home starts. However, with the U.S. housing market still estimated to be facing a 3 million home deficit, these weak financial figures should be temporary and improve over the long haul.
Steady profits and history of returning it all to shareholders
Making the investment case all the more alluring for Omega Flex is its stellar return on invested capital (ROIC) of 30%. ROIC measures a company's profitability compared to its debt and equity. Stocks with higher ROICs like Omega Flex have proven to be market-beating propositions over the longer term. For context, if Omega Flex were large enough to be in the S&P 500, its ROIC would be the seventh highest of the 73 industrial stocks in the index.
On top of this outsize profitability, management has a strong track record of returning excess profits to shareholders. In fact, it returns virtually all of it.
OFLX Net Income (TTM) data by YCharts
Through its steadily increasing quarterly payments and occasional special dividends, the company is laser-focused on taking care of its shareholders. With Omega Flex maintaining a 68% insider ownership percentage, management is well incentivized to keep these dividend payments flowing.
A valuation at five-year lows
Trading at 33 times earnings, Omega Flex isn't necessarily cheap compared to the S&P 500's average price-to-earnings (P/E) ratio of 25. However, it is the cheapest the company has traded in over five years and represents a discount relative to its decade-long average of 41.
OFLX PE Ratio data by YCharts
Adding more excitement to Omega Flex's valuation situation is its 1.8% dividend yield, essentially at all-time highs outside of marks set a few months ago.
OFLX Dividend Yield data by YCharts
This is a promising sign for dividend-focused investors as they can "lock in" this dividend yield (assuming the dividend isn't cut, which, with a 59% payout ratio, it shouldn't be) today and see it steadily inch higher.
Omega Flex may look like a boring leader in its niche that Wall Street analysts can't be bothered to follow, but that's the beauty of this relatively unknown but premium business trading at a fair price. Thanks to the company's steady operations, outsize profits, and consistent dividend payments, Omega Flex looks like a perfect dollar-cost-averaging candidate to buy in increments throughout 2024.