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Gibraltar Industries, Inc.


Gibraltar Industries, Inc. (ROCK) is a manufacturer and distributor of products for the building, industrial, and solar/conservation markets. [1] Products include roof and foundation ventilation products, mailboxes and storage lockers, structural bearings for roadways and bridges, and solar racking and greenhouse structures. [2] Gibraltar reports in three business segments: Residential Products, which is almost half of sales; Industrial and Infrastructure; and Renewable Energy and Conservation. The company was founded in 1972 and is headquartered in Buffalo, NY.

Investment thesis

In 2015, Frank Heard became CEO and five new independent directors were appointed to the board. Mr. Heard came from Illinois Tool Works (ITW) and brought three new executives with him to Gibraltar. He saw an opportunity for Gibraltar to implement ITW’s 80/20 operational strategy. The strategy is based on the analysis that 25% of the customers typically generate 89% of the revenue in a business, and 150% of the profitability. [3] Since 2015, Mr. Heard has executed on this plan and improved adjusted operating margins from 7.6% in 2014 to 15.8% in 2016. [4] For a time, the stock price appreciated as the company showed operational improvements.

The stock has come in, however, almost 30% over the last 52 weeks. [5] We thought the pullback was likely due to weakness in the industrial segment from slower demand energy and commodity markets and also potential new regulations related to solar. We felt that these were likely short term issues.

Confirmation through research

We talked with the CEO and CFO to better understand the risks. Our call revealed that the growing backlog has been driven by infrastructure awards. While oil and gas revenue has been weak, we see an opportunity for the Industrial and Infrastructure segment to rebound with these new awards and drive increased sales in 2018. On the solar side, there were two overhangs, one relating to taxes, and the other, tariffs. We learned that the tax credit concern has been removed and the risk of a high tariff has abated. While the President can ultimately implement a tariff at any level, it is expected that he will implement the level recommended by the FTC, which ended up being lower than many expected. [6]

Variant Perception

Once we were comfortable with the risks, we turned to Gibraltar’s earnings potential. We expect organic sales to grow mid-single-digits in the medium term driven by Residential Products and Renewables with upside in infrastructure spend pickups. We think Residential can drive margins higher and see an opportunity for it to push the locker products into new markets, such as hospitals and universities. With no debt, the company is likely to be acquisitive and add value to an acquired company by applying the 80/20 strategy. [7]

With the stock down almost 30% and trading at a discount relative to historic valuation levels and peers, we felt that it was the right time to take a position in ROCK. [8]