Florida Window, Door Maker Benefits From Housing Boom
When the housing bubble burst some years ago, the impact on window and door maker PGT was both severe and prolonged.
Annual sales dropped from a peak of $372 million in 2006 to just $167 million in 2011. Earnings had reached 94 cents in 2006. But Florida-based PGT lost money from 2008 to 2011.
Like a confused bird slamming into one of its own picture windows,PGT ( PGTI ) was stunned but only seemingly lifeless.
In recent months, the firm has posted improving results. And it is now poised to benefit in several ways from its status as the leading maker and seller of impact-resistant windows and doors in Florida.
The Florida market that makes up more than 85% of PGT's business has awakened. Housing starts in the Sunshine State, as well as sales and prices of existing homes, have all been rising. This has encouraged PGT CFO Jeff Jackson, who believes the Florida housing rebound is for real.
"PGT expects the Florida new-home construction market to grow at a compound annual rate of 40% over the next three years," Jackson told IBD.
PGT specializes in aluminum and vinyl-framed impact-resistant windows. Analysts estimate it has more than 50% of the Florida market for such windows. And with hurricanes a recurring threat, building codes have been tightened to protect against both wind and the dangerous debris it sends flying. Florida code enforcement has made it the place to be for PGT. "The codes are much more stringent and much more enforced," said Jackson.
As a result, reports Dougherty analyst Jeremy Hamblin, impact-resistant doors and windows account for 30% of the Florida market. "Eventually, it will be 50% or more," said Hamblin.
And analysts believe that PGT has the ability to grow share in a growing market. "They have a very strong competitive advantage," said Hamblin. PGT is vertically integrated, producing its own impact-resistant glass through a process of lamination. This integration gives PGT "a significant cost advantage," according to Hamblin. And since it is less dependent on outside suppliers, PGT can more swiftly fill orders.
"Their lead times are much shorter. They can turn around orders more quickly. They don't have to go to a third party," Hamblin said.
PGT has been in the black the last five quarters. In its second quarter, PGT delivered its "strongest quarterly sales growth since 2006," CEO Rodney Hershberger told analysts in August. The company reports third-quarter results Wednesday. "I do expect a good report," said Hamblin.
Jackson would not discuss full-quarter results just before reporting but he did say that both July and August were strong months.
PGT bulls note that new-home sales in Florida, though rebounding, are still well below historic averages. The long-term average for Florida housing starts is roughly 100,000 per year, explains Hamblin. After topping a bubbly 200,000 in 2005, new starts shriveled all the way down 26,000 in 2009. Now on the rebound they reached roughly 42,000 last year. That's still less than half the historic average. "We think it's going to continue to grow at 20% a year," he added.
But Sean Snaith, director of the Institute for Economic Competitiveness at the University of Central Florida, has his doubts. Much of the Florida buying thus far, he says, has come from private equity investors looking for return on investment bargains. Cash sales, he notes recently, represented 42% of new-home sales. "Forty-two percent is still pretty high for cash sales," he noted.
"My concern is that the transition from financial buyers to traditional financed consumer purchasers will not be seamless," said Snaith.
Financial buyers may find the market less appealing as prices rise and prospective returns shrink. Snaith wonders whether there are enough employed consumers who can get the credit required to step in and sustain the housing revival.
As important as new-home construction is for PGT's business, it still accounts for just 30% of sales. The other 70% comes from customers who buy new windows and doors in the process of repairing or remodeling older homes.
Even if new-home construction continues to boom as Jackson expects, growth in this much larger part of PGT's business will be relatively subdued. Typically, says Jackson, repair and remodel on a national basis tends to grow 5% to 6% a year. He expects the Florida refurbishing market to grow a bit better than that over the next three or four years.
Prices Up, Spending Up
Remodeling activity tends to rise with home prices, notes Jackson. "When home values go up, people spend money. That's what we're seeing," he noted. Lower unemployment and rising stock prices, both of which Florida has enjoyed of late, have also helped.
And there is another wild card loose in the deck. Actually, it may soon be floating somewhere off tropical waters. A major hurricane hasn't made landfall in Florida since 2005. That streak must eventually end. And when hurricanes hit, lots of homeowners get impact-resistant religion fast.
Stunned and left for dead several years ago -- as recently as December 2011 shares closed below a dollar -- PGT now seems like a good bet to continue unimpeded flight for a while.