A component supplier for major OEMs in RV, Marine, and Manufactured housing. You might have never heard the name but they have compounded earnings ~40% a year for the last 10.
Great post Michael. We are long-term shareholders in the company and we think the business is currently underappreciated and that the valuation is very attractive. Although we share your concerns about the business cycle, my opinion is that one has to buy these businesses when there are some clouds over the next few quarters.
You did a very good job in describing the company, so I don't have much to add. Maybe I would highlight the following points (in no particular order):
- I would point out the nature of PATK's cost structure, which is highly variable as automation is not high in the industry. That makes economies of scale very difficult to achieve, but it gives you some cushion during recessions. Although economies of scale are not high as I said, the limited size of the market (for most parts production may be less than 200k units per year) makes future competition to be very unlikely.
- LGI is a formidable competitor as you said, but overall market shares mask the reality that industry concentration is higher than it appears. Although they do compete for the same customers, they specialize when it comes to specific pieces (LGI has historically had a stronger aftermarket business). Obviously, OEMs would not risk their supply chains with just one provider (as the recent supply chain crisis has taught us), but it is true that for some pieces the suppliers have almost total control of that niche.
- I also worry about OEMs' future vertical integration plans (as the acquisition of Airxcel by THOR exemplifies), but I think it has been an one-off acquisition. For what it's worth, in my conversations with PATK they don't seem to be very worried about this trend (I cannot comment about the marine side). They are very close to their customers so one would assume they know something. It is true that THOR's future growth plans are less enticing from now on (European market is a less attractive market for THOR as it is a highly motorized one, and further US acquisitions would probably encounter antitrust issues), but I think at some point (when the cycle turns) they will pivot to share buybacks as the most rational use of their capital.
- Finally, as you point out, Indiana is where the industry is localized. That gives some advantages, in terms of costs (labour is an important component of total costs) and in terms of competition, as the industry is not exposed to international competition, as it has happened in the auto industry. I think this last feature has been crucial in sustaining a good level of profitability in the RV industry, and more importantly, it does not seem it will change in the future.
I wrote some months ago an analysis on PATK, just in case you are interested:
I hope it helps.
Hi Michael, great write-up! Was wondering which screener you're using since I am looking for a good one (ideally free) for quite a while now.