It's March 2016. Three months from the start of hurricane season in America. If you're an investor, that means that right about now is a good time to start thinking about hurricanes, the damage they can do -- and the stocks that go up after a big storm strikes.
One such stock is PGT (NASDAQ:PGTI), the leading manufacturer of impact-resistant glass windows and doors in the U.S. Southeast, along the Gulf Coast, and in the coastal mid-Atlantic states. And for better or for worse, PGT stock just got a bit cheaper.
You can thank (or blame) the analysts at KeyBanc for this, because early this morning KeyBanc announced a downgrade of PGT stock that sent the stock tumbling nearly 5% in early Wednesday trading.
That seems like a pretty big slide for the stock to take just on the word of one analyst. And yet, according to our data here at Motley Fool CAPS, KeyBanc is not just any analyst. Rather, over the 10 years we've been tracking this stock picker's performance, KeyBanc has proven itself to be one of Wall Street's best analysts. KeyBanc not only gets most of its stock picks right, it also outperforms the S&P 500 by an average of 15 percentage points per pick -- and outperforms better than 95% of all investors we track. Knowing this, you might be curious to know a bit more about what KeyBanc has to say about PGT,
Here are three of those things.
Thing No. 1: PGT is profitable
Before getting around to cutting PGT (from overweight to sector weight, according to Streetinsider.com), KeyBanc prefaces its downgrade with a few words of commendation. PGT, says KeyBanc, beat estimates in its Q4 financial report last week, earning $0.07 per diluted share. This, notes the analyst, is an indication that show certain "issues" that concerned investors in Q3, when PGT missed guidance, "have passed."
Guidance looks good, too, with PGT promising to grow sales 20% year over year in 2016, and to increase earnings before interest, taxes, depreciation, and amortization an even more impressive 26%. According to management, "Revenue achieved in fiscal 2015 [was] a company record, and a level we have not seen since 2006."
Thing No. 2: Things may not be as good as they seem
That all sounds pretty good for PGT. And yet, according to KeyBanc, the future might not be quite as bright as PGT's guidance makes it seem. In particular, TheFly.com highlights a KeyBanc warning that "existing home sales appear to be decelerating in Florida," which is "PGT's most significant geographic market."
Thing No. 3: Costs are rising
KeyBanc also notes that rising selling, general, and administrative costs are going to weigh heavily on profits in the year ahead. This wasn't an issue in Q4, when SG&A spending rose only 8% on a 12% rise in revenue, but it could be a problem in the year ahead.
These worries take the analyst's best guess at 2016 profitability down from $0.75 per share to only $0.59. That's more than a 20% drop.
And one more thing...
Is KeyBanc right to be forecasting potential disappointment at PGT, after such a successful Q4? The analyst's strong record of outperforming the market lends confidence that it KeyBanc may be right. What's more, the numbers appear to back this up.
Consider: Valued on trailing profits, PGT stock costs 21 times earnings. That doesn't seem too unreasonable. Rival building glass producer Apogee Enterprises (NASDAQ:APOG) costs about 20 times earnings itself. And according to Yahoo! Finance figures, Apogee is only expected to grow its earnings 10% annually over the next five years, whereas PGT is pegged for a 30% growth rate.
And yet, if you look a little closer, the picture here is not quite as rosy as it seems. S&P Global Market Intelligence, for example, predicts not a 30% growth rate for PGT, but only 20% (a number that, if correct, would take PGT out of undervalued territory and make the stock look only fairly priced at its current P/E). S&P Global's estimate for growth at Apogee, meanwhile, confirms the 10% guess.
S&P Global figures also show that, over the past three reported quarters, free cash flow at PGT amounted to only $7.7 million -- less than 40% of reported net income. Granted, PGT has not yet released full-year cash flow figures, and it's possible that Q4 will show the company to have made up the difference. Based on what we know now, though, there do appear to be grounds for worry that PGT stock is not quite as profitable as it seems.
Long story short: We'll probably have to wait for PGT's 10-K filing to come out before we can confirm that free cash flow is an issue at the company. Until then, however, KeyBanc's suggestion that you curb your enthusiasm about the stock, and take growth predictions with a grain of salt, seems like sound advice.
Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 270 out of more than 75,000 rated members.
The Motley Fool recommends Apogee Enterprises. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.