In the current recession, many manufacturing companies have been hit by near-term challenges. I believe this presents opportunities for long-term investors who are willing to ride out short-term challenges. In this article, I’m focused on Carlisle Companies Incorporated (CSL). While it may not be a household name, it is a well-recognized name in the industries that it operates in, as it serves many leading business customers. I see value in investing this company at the current price, and will show why; so let’s get started.
(Source: Company website)
A Look Into Carlisle
Carlisle Companies is a well-recognized global company that manufactures highly engineered products and solutions. What I like about Carlisle is its diversified business model, which touches many industries. Its markets include commercial roofing, specialty polyurethane, architectural metal, aerospace, medical technologies, and defense, to name a few. In 2019, the company generated over $4.8B in total revenue.
COVID has presented Carlisle with some near term challenges, as its second quarter revenue dropped by 22% YoY. This weakness was primarily driven by the company’s CCM (Carlisle Construction Materials) and aerospace businesses. It should be noted that the company’s CCM business is driven by replacement demand, and not by new construction. I see this as being a positive, as this makes Carlisle less vulnerable to the cyclicality of the construction industry. Looking forward to Q3 results, I expect to see an improvement in CCM, as management began to see an improvement in daily sales volume that began in May and continued into early Q3.
I expect continued weakness in Q3 for the aerospace business, as its near-term results are tied to Boeing’s (BA) 737 Max in particular. I do believe, however, that this segment may start seeing an upward trend in the later part of this year and next year. This is supported by ongoing progress that Boeing is making with the FAA in getting clearance for the 737 Max. In an Oct 9thnews article in the BBC, Ryanair (RYAAY) noted that it expects the 737 Max to be cleared to fly again in the U.S. in the next month or so.
Meanwhile, I’m encouraged to see continued strength in Carlisle’s medical technology segment, which it acquired several years ago, and has grown over the years both organically and with bolt-on acquisitions. This segment grew by 15% YoY during the second quarter, due to increased demand for COVID-related patient monitoring equipment. I expect to see continued strength for this segment through the rest of the year, as COVID infection rates haven’t really abated, and could actually surge as temperatures get colder.
Turning to the balance sheet, Carlisle appears to be on solid financial footing, with $738M in cash on hand, and $1B in availability on its revolving line of credit. Its net debt to EBITDA sits at just 1.7x, which is below the 2.0x level that I generally regard as being safe. Carlisle also has strong interest coverage, with a strong EBITDA to interest ratio of 11.0x.
Based on the analyst EPS estimates below, Carlisle is expected to post a down year in 2020, and rebound in the following two years.
With this in mind, I wanted to calculate what the PEG ratio is, with the following inputs:
- Price: $127.41
- EPS: $5.71 (2020 EPS Estimate)
- EPS Growth Rate: 19.8 (average of 2021 and 2022 growth rates)
With the inputs above, I arrive at a PEG ratio of 1.13. Using a PEG ratio of 1 as a standard for fair value, the shares appear to be slightly overvalued. However, I don’t believe this is a one-size-fits-all standard.
For what I see as a well-run manufacturer that is also a dividend aristocrat, I believe a PEG ratio range of 1.25 to 1.5 is reasonable. This equates to a potential 11% (1.25/1.13 – 1) to 33% (1.5/1.13 – 1) upside from the current share price.
Analysts seem to agree that the shares are undervalued, with an average price target of $147.75, which sits 16% above the current share price.
In the meantime, I find the current 1.7% dividend to be safe, with a dividend to earnings payout ratio of just 37%, and a 5-year dividend CAGR of 13.9%.
Carlisle Companies has seen some near-term headwinds from COVID that is expected to last into Q3 and possibly Q4 as well. However, I see these problems as being short-term, and expect a rebound in the business next year. Positive signals are already starting to emerge in the CCM business, and I expect to see the aerospace business rebound next year, with the Boeing 737 Max expected to gain clearance from the FAA by the end of 2020. For these reasons and with consideration to the valuation exercise, I have a favorable view of the stock and see upside potential.
(Source: F.A.S.T. Graphs)
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article is for informational purposes and does not constitute as financial advice. Readers are encouraged and expected to perform due diligence and draw their own conclusions prior to making any investment decisions.