CSW Industrials $CSWI
An industrial growth company
I want to apologize because when I first began studying this company it was trading below $160 and it had a better risk reward profile, then I got distracted and began working on other things, meanwhile the stock is up 19%
Key takeaways
CSWI is a niche industrial business that provides an assortment important products.
Contractor solutions, particularly HVAC solutions make up the majority of revenues.
Management has a private equity background
Valuation is a bit full considering slowing growth
CSW Industrials is an interesting industrial growth company in the niche industrial products market. They focus on growing and occasionally acquiring smaller niche companies that serve end markets such as plumbing, electrical, HVAC, mining, drilling, oil, refining, food and beverage.
They were spun off from a private equity firm called Capital Southwest Corporation CSWC 0.00%↑ in 2015. They operate in three segments, contractor solutions, Engineered building solutions, and Specialized reliability solutions.
Contractor solutions
Contractor solutions is the biggest and most profitable segment with EBIDTA margins in the 27-30% range compared to the other segments which are in the 14-17% range. HVAC and refrigeration in particular is the biggest portion of their over all revenue coming in 55% driven by repairs and replacement of Heating, ventilation air conditioning and refrigerating systems. This is also seasonal with the peak sales season beginning in March and continuing through August. Which explains why they choose to report quarterly earnings in February and August.
In the contractor solutions segment, they basically acquired a few companies that provide products for HVAC, Plumbing and electrical contractors. I’ve used many of these products before, they aren’t specialty products, they are boring, niche yet crucial products like pipe sealants, valves, seals, fire sealants, HVAC registers and grills, diffusers, wire grabbers and wire snaggers, and various other products. These are simple yet necessary products in the contracting business.
They have three main brands here, Rectorseal, Truaire and shoemaker which have multiple companies folded into their brands.
Engineered solutions
This segments is smaller and consists of niche products in the industrial, commercial sectors. For example one company makes specialized expansion joins, stair nosing, and fire stopping solutions for commercial applications. Also architectural hand rails. You would find some of these products in large multistory apartment complexes or commercial buildings downtown. They define these as “code-driven, life-safety products’
“Code driven” simply means they are supplying a product that is designed to satisfy the requirements of the International building code.
Specialized reliability solutions
These are companies that produce an assortment of lubricants, degreasers, threads an aerosols, that are used in the food and beverage, cement, mining, drilling, oil, pulp and paper, railway, steel and energy production sectors.
Personal thoughts
Again, at first glance the majority of products they sell seem boring and unglamorous, which they are. I mean C’mon, pipe sealants? Why would I want to own a company like that when I could own Tesla? Good question.
I used to think that hyper growth tech stocks were the only way to compound capital in the stock market. Don’t get me wrong I own some tech stocks, and I think there will be some huge winners over the next few decades. But the reality is, there are great companies in stable, understandable industries that can actually be great investments if management prudently allocates capital.
Management
Joseph B. Armes is the CEO. He was the CEO of the private equity company that was previously the parent company of CSWI. That company is Capital Southwest Corporation, traded on the NASDAQ under the ticker CSWC 0.00%↑ It was basically a private equity company focused on lending to middle market companies. They spun off CSWI with the intention of creating a growth industrial company and separating it from the financing aspected of CSWC.
Below you can see their capital allocation strategy. Im not sure if they prioritized these in order but if I had to order them correctly, I would say their main priority has been growing and optimizing the companies they already own, then acquisition, then buybacks or dividends. They haven’t made a ton of acquisitions since their spin off, Which is why I’m hesitant to call them a serial acquirer.
I personally would like to see them take a more acquisitive approach and focus on buybacks if they cant find new acquisition targets.
Valuation
This is an industrial company focusing on organic growth, so I don’t think it’s appropriate to give it an end multiple of anything higher than 25x which would be a contraction from where it currently trades at about 30x earnings.
Im also not quite sure what growth rate to use but the one below is slower than what they’ve seen in the past few years. Their revenue has slowed to 2% last quarter which is probably because of slowing economic activity, however I know that the majority of their revenue (55%) is seasonal and dependent on HVAC/R systems being repaired and replaced during the hottest months of the year so we could see surprises to the upside. Regardless Im using a more conservative set of assumptions.
Final thoughts
This is an interesting company that certainly has long term growth prospects, but it also has short term macro headwinds which is why I have mixed feelings about it, at least at the current valuation. I also would prefer they use their cash to buyback more shares and make more acquisitions rather than pay dividends.
Over all it’s seems like it could be a little gem but again its a fully priced gem in my opinion.
Thanks for reading!