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Thompson Research Group, 1033 Demonbreun Street Ste 625, Nashville, TN (2026)

12/02/2023

TRG this week conducted meetings with institutional investors in Boston with HNI Corp. (HNI). Meetings this week highlighted the margin expansion story in the midst of fairly stagnant volumes. We believe the thesis is legitimate and YTD results are validating this. Margins should improve further when people (tenants in offices and homeowners) start moving around more. Despite the stock being up 30% YTD, TRG believes the positive factors in the story are not fully priced in. Workplace is in the early stages of an attractive margin expansion story and believe HNI’s Workplace is positioned favorably given its customer exposure to SMBs. Notably, smaller cities have largely returned to the office and occupancy is largely back to pre-pandemic levels. Smaller cities have also benefitted as many people in large urban areas have left those cities in recent years. Management expects margins to reach the high-single-digit zone at the current volume level. Resi sales are down on tough comps and a slow market (sales evenly split between new construction and R&R). New construction has outperformed Resi much of this year. With SF starts data stabilizing and rising starting mid-23, HNI expects better results in the coming quarters and could show growth in 2024. R&R is fairly tied to housing turnover, and given the higher rates and consumer concerns, management is expecting somewhat flattish sales next year. Note that Resi margins are bottoming (at a still solid) ~17% this year and expect improvement into calendar 2024.

TRG this week conducted meetings with institutional investors in Boston with HNI Corp. (HNI). Meetings this week highlighted the margin expansion story in the midst of fairly stagnant volumes. We believe the thesis is legitimate and YTD results are validating this. Margins should im

11/17/2023

October housing numbers came out this week and continued the theme of “less bad” as demand remains for housing and the supply chain continues to find ways to deliver homes in a high rate environment. October starts were at 1,372K (above consensus of 1,345K) and Building Permits were 1,487K (above consensus of 1,446K). Starts overall continue to see sequential momentum, up 2% over September’s read, led by multi-family that is up 5% with single family up 0.2%. A better read is comparing today’s levels to the start of the year. Single family is up 18% while multi family is down 25%. We believe this dynamic will continue to play out into early 2024 as single family is aided by moderating rate increases and builder’s utilizing rate buy-downs, while multi family is expected to see continued slowdown in starts as the near record number of multi family units under construction continues to work itself down.

October housing numbers came out this week and continued the theme of “less bad” as demand remains for housing and the supply chain continues to find ways to deliver homes in a high rate environment. October starts were at 1,372K (above consensus of 1,345K) and Building Permits were 1,487K (abov...

10/27/2023

As Q3’23 earnings season ramps up and against the backdrop of a lousy market, TRG noted this week the power of sentiment on relative stock performance. Commercial-construction and RMI-focused Armstrong World (AWI) reported an earnings beat this week, and the stock traded up ~10% intra-day vs. the S&P 500 up ~1% on a “less bad” market outlook. The headlines for commercial remain grim with stats such as the Architectural Billings Index (ABI) dipping below 50 eight out of the last twelve months and with September’s reading of 44.8 the lowest since Q4’21. Note that a “less bad” theme also sent resi end-market focused stocks upwards earlier in 2023. By contrast, Owens Corning (OC) stock traded off 9-10% intra-day vs. the S&P 500 down ~1% the day of earnings this week. While the stock earlier this year traded up on “less bad” residential end market news, OC stock this week was hit by a slightly lower Q4 Street expectation, even in the face of a Q3 earnings beat and overall solid financial metrics. Putting this into perspective, OC YTD generated $631MM in FCF (78% FCF conversion), maintains liquidity of $2.4B, and returned $187MM to shareholders through dividends and repurchases. OC’s return on capital for the TTM is 20%, an impressive level given the fluctuations across the business. It goes to show that even with parallel earnings beats and solid financial beats, it’s all about relative perspective.

As Q3’23 earnings season ramps up and against the backdrop of a lousy market, TRG noted this week the power of sentiment on relative stock performance. Commercial-construction and RMI-focused Armstrong World (AWI) reported an earnings beat this week, and the stock traded up ~10% intra-day vs. the

10/20/2023

This week, TRG initiated coverage of Alta Equipment Group (ALTG), a franchised dealership selling Construction Equipment and Material Handling equipment used in non-res construction projects and in manufacturing/warehouses. The key brands represented include Hyster-Yale, Volvo, JCB, and Kubota. As a one-stop shop, Alta also provides parts and services (P&S) on equipment, as well as equipment rentals. The P&S is the gem of the business, as gross margins of ~45% are 3x the level of selling equipment (mid-teens GM) and provide steady recurring revenue for the years after selling equipment. Selling more equipment leads to a larger field population and more P&S sales in the coming years. We believe sales will be strong in the coming years for: 1) robust demand backdrop from re-shoring and federal funds supporting both non-res construction and manufacturing activity, 2) the OEMs are producing more equipment as the supply chain normalizes, all of which leads to greater P&S growth in the coming years. We believe EBITDA margins will expand from ~10% now by ~50 bps per annum due to: 1) aging and growing field population, 2) the Construction Equipment segment is less mature than the Material Handling segment, but is improving, and 3) recently acquired companies grow and leverage the cost base. Lastly, the dealership industry is extremely fragmented and OEMs have gated off PE from entering the space. We believe Alta will continue to do more deals at modest multiples, which could add meaningfully to our estimates. All in, we see a robust business model with a bright future that is nearly half off its prior high of ~$20/share in February.

This week, TRG initiated coverage of Alta Equipment Group (ALTG), a franchised dealership selling Construction Equipment and Material Handling equipment used in non-res construction projects and in manufacturing/warehouses. The key brands represented include Hyster-Yale, Volvo, JCB, and Kubota. As

10/13/2023

Worthington Industries this past week hosted an investor and analyst Day in New York City where future senior leaders representing Worthington Enterprises and Worthington Steel provided an in-depth review of their strategies to drive long-term growth and shareholder value. TRG joined the Worthington Enterprises portion of the day. Not unlike the light being shown on Core & Main’s (CNM) niche business model (CNM was previously the Waterworks division of HDSupply), the Worthington Enterprises investor day highlighted the power of a differentiated business model well positioned to benefit from key secular tailwinds. Worthington Enterprises is a market-leading designer and manufacturer of innovative building products, consumer products, and sustainable energy solutions. This is a high margin, asset-light business model, generating strong cash flow and returns. Post spin, the company should be well positioned financially to continue growth – debt to EBITDA targeted to 1x and free cash conversion 85%+. Through innovative JVs with Armstrong World (AWI) for ceiling grid to developing world-leading developer and manufacturer of products supporting the global, growing hydrogen ecosystem (a more practical solution for long-haul trucking vs. heavy electric vehicle solutions), Worthington Enterprises brings to the investing community a unique business model that checks many boxes in light of the realities of the current market.

Worthington Industries this past week hosted an investor and analyst Day in New York City where future senior leaders representing Worthington Enterprises and Worthington Steel provided an in-depth review of their strategies to drive long-term growth and shareholder value. TRG joined the Worthin

10/06/2023

This past week Southern U.S.-focused road construction firm, Construction Partners (ROAD) and water infrastructure focused Core & Main (CNM) hosted investor days in NYC. This was the first investor day for both companies post IPO (ROAD IPO was 2018, CNM was 2021). Common themes emerged from both investor days, including a singular focus on core strategy and cash valuation metrics. ROAD reiterated its focus on hot-mix asphalt road construction, focused on building market concentration in core and adjacent Southern U.S states. In our opinion, the asphalt road construction business is in the early stages of growth and consolidation, similar to the aggregate industry in the ’90s and ‘00s. ROAD’s geographic footprint fits squarely in high growth markets that are prime targets for consolidation. ROAD seeks essentially to double EBITDA by FY’27, while maintaining a cash conversion rate in the 52-60% range. CNM took the opportunity to clarify the company is a trusted partner in the water infrastructure construction market that also happens to be able to provide product. As such, CNM is not “just” in the distribution business. CNM seeks to grow EBITDA nearly 50% between FY’23-FY’28, in addition to improving cash conversion from 35% to 60-70% over the next five years. Now that money isn’t free and the cost of capital is on the rise, cash really is king. We expect companies will be rewarded for both its ability to grow core earnings (i.e., not just acquire additional earnings) and cash conversion in this cycle.

This past week Southern U.S.-focused road construction firm, Construction Partners (ROAD) and water infrastructure focused Core & Main (CNM) hosted investor days in NYC. This was the first investor day for both companies post IPO (ROAD IPO was 2018, CNM was 2021). Common themes emerged f

09/29/2023

CRH earlier this week successfully transitioned to the U.S. stock exchange (NYSE) from the London Stock Exchange (LSE), and in conjunction with this event, hosted an investor day in NYC. In our opinion, CRH’s investor day was an opportunity was an education ramp for U.S. investors and analysts alike. While CRH has well-publicized its shift to the NYSE from the LSE, there remains a gap in understanding the range of products and services with U.S. investors. For being a well-sized company – $40B market cap – it is still surprising how CRH has remained under the radar screen. TRG saw this opportunity earlier this year, informed by our prior experience with Ferguson (FERG), another giant European-based company deriving the majority of its revenues in the U.S. market that shifted from the LSE to the NYSE. TRG initiated coverage on CRH in early June on the thesis of a company benefiting from several key secular trends, including 1) reshoring/near shoring; 2) structural U.S. population shift to “smile states”; 3) meaningful increased investment in environmental matters; and 4) passage of significant U.S. and state funding initiatives supporting a 5+ year runway for infrastructure and private construction projects. How did the stock perform on the first day trading on the NYSE? The stock outperformed the market, as CRH traded up ~5% vs. an essentially flat S&P 500.

CRH earlier this week successfully transitioned to the U.S. stock exchange (NYSE) from the London Stock Exchange (LSE), and in conjunction with this event, hosted an investor day in NYC. In our opinion, CRH’s investor day was an opportunity was an education ramp for U.S. investors and analysts ali...

09/22/2023

Steelcase had a strong quarterly report this past week (the ole beat and raise), taking EPS guidance up to $0.80-0.90 (from $0.55-0.75). This drove the stock to pop nearly 20% the day following results, and that gain has increased a bit further in the days following. While recent and near-term results are benefitting from the burning off of excess backlog that contains past pricing actions, which is driving higher gross margins, the future results will be more dependent on incoming orders. Orders have been down ~7-8% YOY in each of the last three quarters, which we find encouraging as it shows companies’ willingness to spend on offices amidst an uncertain macro backdrop. This stabilizing pattern comes from: 1) more companies mandating employees be in the office more often, and 2) growth in continuing business activity (smaller office refresh spending) vs. project orders declining. We are modeling that this stability lasts another 2-4 quarters, before showing YOY growth. Since Steelcase has caught up on price-cost and taken dramatic cost saving actions, volumes rising should drop through nicely to earnings. SCS is one of the few potential COVID-recovery plays remaining (current stock is 46% below its pre-COVID quote).

Steelcase had a strong quarterly report this past week (the ole beat and raise), taking EPS guidance up to $0.80-0.90 (from $0.55-0.75). This caused the stock to pop nearly 20% the day following results, and that gain has increased a bit further in the days following. While recent and near-term resu

09/09/2023

Core & Main (CNM) this week reported a Q2’23 earnings beat as margins once again held up better than expected. The stock traded off ~8% intraday vs. the S&P 500 down 1%. We think the stock reaction was driven by a few factors. CNM color on softening new start activity in parts of non-res end markets were not meaningfully different what heavy materials producers (who are earlier in the construction value chain) had reported in late July/early August – while multi-family and warehousing was softening, other non-res end markets such as manufacturing and data centers continue to see growth. Headlines read that the top end of full year sales guidance was lowered due to signs of softening in non-res. Just this past week, TRG hosted investor evens with Granite Construction (GVA) and Vulcan Materials (VMC) in the northeast, with both companies echoing a similar sentiments today on the non-res end market. GVA acknowledged a dip in non-res and is already seeing trends recover for that company. Global equipment rental company Ashtead Group (AHT) recent earnings also highlighted mega project driving U.S. subsidiary Sunbelt demand, benefitting from a record level of construction starts, fueled by on-shoring/re-shoring, manufacturing and data-communication investments (data centers, EVs, warehousing, utility/grid), and legislative acts that could amount to $2T of investments. Still, signals remain mixed by company type and project type, and the Street is sitting up and paying attention to the reality of softening of non-res in certain end markets. The resi scare from earlier this year is mostly behind us (at least from a sentiment standpoint), and the follow-on effect to non-res is now an area of investor focus. In all, TRG expects to see lackluster stock performance this fall from non-res focused names, even if companies such as CNM continue to do all the right things.

/www.trg.co/blog/trg-the-bottom-line-9-8

Core & Main (CNM) this week reported a Q2’23 earnings beat as margins once again held up better than expected. The stock traded off ~8% intraday vs. the S&P 500 down 1%. We think the stock reaction was driven by a few factors. CNM color on softening new start activity in parts of no

08/25/2023

CRH this week reported an earnings beat with 1H’23 EBITDA of $2.5B vs. our $2.4B and consensus of $2.38B. The quarter played out largely within TRG expectations, with robust pricing momentum carrying the way as volumes balance overall strong demand with weather impacts. Margin growth (90 bps at the consolidated level) benefitted from pricing gains which management expects to continue momentum into 2024. CRH is “the largest beneficiary of unprecedented growth” in U.S. infrastructure spending (~40% of US sales) as the largest road builder and a full-service provider of road construction and utility infrastructure. CRH also noted strength in non-res mega projects (non-res 30% of US sales) being driven by onshoring activity that is a decade long tailwind. Management on its earnings call highlighted that these two areas are where CRH excels, delivering large scale and complex projects and being a partner throughout the process. CRH capitalized on multiple revenue opportunities throughout the project lifecycle and has been able to capture more margin dollars compared to lesser complex projects. We believe this is where the industry is going as projects become larger and more complex (design build growing in use, mega projects just beginning, etc.), with CRH able to see outsized benefits by contributing across the project lifecycle. The next big milestone will be CRH’s shift to primary listing on the NYSE on or around September 25th. U.S. investors are paying closer attention, which is starting to be reflected in its stock price, too.

CRH this week reported an earnings beat with 1H’23 EBITDA of $2.5B vs. our $2.4B and consensus of $2.38B. The quarter played out largely within TRG expectations, with robust pricing momentum carrying the way as volumes balance overall strong demand with weather impacts. Margin growth (90 bps at th...

08/18/2023

TRG hosted a virtual NDR with southeastern-focused equipment rental company H&E Equipment (HEES, $45.19, market cap of $1.6B) this past week, highlighting an opportunity at the right price. We have long-favored the publicly-traded equipment rental companies (URI, HRI, and HEES), given these companies are relatively large in a fragmented and growing equipment rental industry. HEES, URI and HRI have scale advantages versus smaller private peers, which has fueled strong revenue growth with rising EBITDA margins, alongside very modest leverage. That said, as this stock chart demonstrates, H&E’s stock price has lagged the other two companies meaningfully. We believe this valuation disparity is unjustified. H&E is now a pure-play rental company after having divested its distribution units at the end of calendar 2022. H&E is smaller in size and yet maintains EBITDA margins in a similar zone to its larger public peers (HEES ~46%, HRI ~46%, URI ~48%). This delta represents an opportunity. We believe H&E will grow revenue 19% and 15% in each of the next two years, yet sells at ~4x EV/EBITDA. As such, we expect robust EBITDA growth and multiple expansion in the future.

TRG hosted a virtual NDR with southeastern-focused equipment rental company H&E Equipment (HEES, $45.19, market cap of $1.6B) this past week, highlighting an opportunity at the right price. We have long-favored the publicly-traded equipment rental companies (URI, HRI, and HEES), given these

08/13/2023

TRG has described office furniture and hearth manufacturer HNI as a catapult story, as challenged near-term volumes in both end-markets were hiding the margin enhancement initiatives that have been in-flight. HNI reported earnings this past week, providing an opportunity to gain a clearer view of the company’s progress. Q2’23 results revealed tremendous margin improvement in the Workplace segment, and the earnings call brought meaningful nuggets that should help investors more fully appreciate the Kimball acquisition and add to earnings power. While many mergers often bring operating headaches and reduce shareholder value, this appears to be the opposite. HNI closed the Kimball deal in early June, and HNI has already announced a deal to divest Kimball’s Poppin’ unit (acquired in 2020), which has been a drag on margins. HNI also posits there could be upside to the synergy amount of $25MM from the Kimball deal. Core Kimball is generating operating margins in the high-single-digit range, while core HNI Workplace margin is closing in on that level in Q2. The Resi segment margins were abnormally low in Q2 (11.2%), but management expects a steep stair-step upwards in Q3 and Q4 to reach high-teens levels on a FY basis. Workplace is showing modestly better YOY demand, and HNI’s robust margin expansion in the quarter is a testament to this viewpoint. We have greater conviction that the Kimball merger adds pop to the catapult, and 2H’23 margins are projected to be in-flight even before volumes really start to inflect.

TRG has described office furniture and hearth manufacturer HNI as a catapult story, as challenged near-term volumes in both end-markets were hiding the margin enhancement initiatives that have been in-flight. HNI reported earnings this past week, providing an opportunity to gain a clearer

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