Robust Company with Oversold Shares

On occasion we find a company that has experienced a significant reduction in share price, while at the same time experiencing growth and providing outstanding financial metrics.

Good day everyone,

We are initiating coverage on NCI Building Systems, Inc. (NYSE: NCS), a company that designs, engineers, manufactures, and markets metal products for the nonresidential construction industry. Our research indicates these shares could trade at double their current price. Recent analyst’s high targets indicate the potential for a 300% increase in the share price.

Current price                                  $7.88 per share

NCI Building Systems, Inc. is one of the largest manufacturers and marketers providing metal products for the non-residential construction industry. The Company provides a broad range of products which can be used in repair, retrofit and new construction. They also apply coatings to coiled steel for other companies.

On December 24, 2018, James S. Metcalf, Chairman and CEO bought 100,000 shares of NCS stock at a cost of $709,000. In fact, over the past 3 months, insiders have acquired 1.15 million shares. Remember, we report all the public data available to us. The insiders know everything.

Since 2015 the company sales have steadily risen, averaging 10% annually, and EPS has risen, on average, 20% annually over the same period. The company share count declined by 9% over those same four years.  NCS has a FYE of October, and this past October the company broke the $2 billion in annual revenues milestone.

NCI Building Systems declared that its board has initiated a share buyback program on Wednesday, March 7th, 2018, which authorizes the company to buyback $50,000,000.00 in outstanding shares, according to EventVestor. Share buyback programs are often a sign that the company’s board of directors believes its shares are undervalued.

The company revenues could be headed even higher. On January 18, NCS announced it has entered a deal to acquire 100% of the outstanding interests of Environmental Materials, LLC (Environmental Stoneworks) and its affiliates. Environmental Stoneworks is the only manufacturer and installer of stone veneer for the residential and commercial markets. It has five manufacturing facilities, 21 installation centers and nearly 660 employees. Environmental Stoneworks generated revenues of $160 million in fiscal 2017. The acquisition is projected to close this quarter.

NCS is paying $186 million cash for the acquisition, financed with cash and their revolving credit line. There will be no share dilution. The transaction will likely allow NCI to better serve residential customers and could create cross-selling opportunities with its commercial customers.

NCS is in a growth industry. The company products are not only being used in new building construction, they are extensively used in building restorations.

7 Wall Street analysts have issued ratings and price targets for NCI Building Systems in the last 12 months. The most recent rating, by USB Group on January 17th, indicates a high-end target of $23.00 per share.

NCS saw a decline in short interest in the month of December of 51.2% from the November 30th count. The shorts want no part of NCS.

77% of the company shares are held by 254 institutions.

At the beginning of September last year, NCS shares were trading at $17.00 per share and in June last year the shares traded at $23.50 per share. Shares of NCI have declined 57% in the past six months, while its industry’s fell 21.8%. Since NCS is a robust company this disparity may indicate the shares are oversold.

Conclusion:

NCS has a TTM P/E ratio of 8.67 and a forward P/E ratio of 3.62. These data fall short of typical P/E ratios and indicate that NCS could support a share price of $14.25 to $19.95. Forecast earnings for FYE 2019 are $1.33 per share, earnings for FYE 2018 were $.95 per share.

The company Market Cap is only .51X of annual revenue. Value investors consider a P/S ratio of 1.0X to be acceptable. NCS shares could be supported at $16.00 based on the P/S metric.

The company also generates cash flow of $2.11 per share and a return on equity of 33.27%.

On December 24, 2018, James S. Metcalf, Chairman and CEO bought 100,000 shares of NCS stock at a cost of $709,000. This point is worth repeating.

As the chart below indicates, NCS shares are trading below their 50 and 200 DMA of $9.55 and $15.30 respectively. The current RSI (14) is 41.37. These data are indicators of oversold shares.

NCS is a well-run company, generating growing profits and looking toward expansion. The market has let these shares fall too far and they may be due for a significant bounce. We are bullish on NCS shares in the near to mid-term.

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