Is Simpson Manufacturing Co. (SSD) a Worthy Stock Investment?

“Simpson Manufacturing Co. Inc., designs, engineers, and manufactures wood and concrete construction products. These include connectors, truss plates, and fasteners/fastening systems, as well as concrete construction products (adhesives, specialty chemicals, mechanical anchors, powder actuated tools, and reinforcing fiber materials). Structural connectors are typically steel devices used to strengthen, support, and connect load-bearing elements within a building. We estimate that wood connector products are 80% of both revenue and gross profits for the company. Importantly, most of the wood products are for new home construction (50%), with the balance being multi-family construction and repair and remodel (30%).

Good Business

Simpson is a leader in structural connector manufacturing with a solid track record of organic growth and profitability. Management estimates that the company has over 75% of market share in the connector industry. The company’s competitive advantages are built on the Strong-Tie brand, engineering excellence, and superior customer service. This has led to strong pricing power and increasing profitability and cash flow. Simpson maintains significant scale as it manufactures over 15,000 wood products and 1,000 concrete products.  Simpson’s products enhance structural integrity in the event of natural disasters (hurricanes, earthquakes, fires). The company actively works with state and local code writers to improve construction practices, which leads to mandating the use of structural connectors. Much of the country’s population growth is occurring in the Western and Southern regions, which have home building codes that often require greater use of structural connectors in construction. The company generates mid-to-high teens margins and returns on invested capital (ROIC). Since 2018, ROIC has become an important part of management compensation. Free cash flow has approximated 90% of net income over the past 6 years. Simpson has $275 million of net cash and anticipates deploying about 50% of operating cash flow towards dividends and share repurchases.

Valuation

Simpson trades for 11.4 times trailing twelve-month earnings per share (EPS) and 12 times 2023 estimated EPS. Historically, Simpson has traded between 21-34 times trailing EPS and 20-30 times projected earnings. In the last 5 years, the company has focused the business on profitability and ROIC. We argue that this should result in a higher multiple going forward. The shares traded at 11 times forward EPS in 2009, the worst housing crisis in recent times…” (Click here to see the full text)