At its most basic, an investment in PGT Innovations PGTI 0.21% is a bet that there will be hurricanes in Florida. That part is impossible to time. But investors can do well with PGT even if Florida doesn’t see another big storm for years.
PGT controls about 65% of the market for impact-resistant windows and doors in Florida. These windows can stop flying debris in a storm and are part of the building code in storm-prone areas. Last year’s Hurricane Irma, which led to the biggest storm evacuation in U.S. history, was a reminder of the state’s vulnerability after years without a major hurricane. Just 18% of Florida homes have impact resistant windows. The rest rely on storm shutters or plywood for protection.
PGT sales have been strong since then, but sales to existing homes were already up by more than 20% in the two quarters before Irma. That gets to the strength of PGT: After being hammered like the entire Florida building industry in the housing crisis, PGT rebounded, getting some growth from new home sales but more from renovations of existing homes. In the second quarter, sales for renovations grew 30% and accounted for 65% of revenue. To further dominate its market, PGT acquired its two biggest competitors.
The company’s healthy free cash flow—expected to be $62 million to $72 million this year—allowed it to pay down the debt from those acquisitions and to make new ones. This time it ventured out of Florida for the first time and in July agreed to pay $360 million for Western Window Systems which sells high-end, energy-efficient windows, from the West Coast to Texas.
There are good reasons for investors to expect PGT to keep up the momentum. The first half of this year was very strong: Sales were up 24%, earnings more than doubled and margins hit a record. Keeping step, shares of the company, which now has a market value of about $1.3 billion, have nearly doubled in the past 12 months.
The second half of the year definitely would get a boost if another hurricane hit Florida. Even without a storm, though, the company’s backlog is up 64% compared with a year earlier in part because the tight labor market has stretched out the post Irma boom. The company’s guidance calls for slowing growth, which looks unlikely given the backlog. While the stock’s valuation is at the high end of PGT’s historic range, there is evidence the company has moved to another level in terms of scale, diversification and customer awareness of its products.
There are risks. Tariffs have driven up the cost of aluminum, though PGT has been able to hedge its exposure and raise prices to offset the increases. New home sales are sluggish and the growth rate in the company’s renovations business is well above housing turnover, which is what typically drives renovations.
Nobody should wish for a storm, and PGT shares should do well even without one.
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Write to Ken Brown at [email protected]