Value Investors Club / PGT INC (PGTI)

Description

INVESTMENT SUMMARY: PGT is a leading Florida-based manufacturer of premium quality impact-resistant

windows and doors. PGT is in a dominant competitive position in a very niche and lucrative market that results in

gross margins that are double its closest peers in addition to much higher levels of growth, free cash flow, and

returns on capital. PGT should realize significant growth going forward due to a rebound in the Florida housing

market and rising secular demand for impact resistant windows and door. Shares trade at 16.5x FY 2016 earnings,

which are attractive considering consensus EPS growth of over 30% over the next three years.

COMPANY OVERVIEW: PGT is a small manufacturer of impact-resistant (hurricane proof) and non-impact resistant

windows and doors. The company serves the Southeastern U.S. housing market, primarily Florida. As of 1HFY15,

impact-resistant products represented 81% of sales, and non-impact products represented 19% of sales. PGT sells

to both the home repair and remodeling market and the new home construction market. Key brands include

WinGuard, Estate, Sentinel, PremierVue, Eze-Breeze and EnergyVue. The company was founded in 1980 and

currently has approximately 2,200 employees. PGT operates manufacturing facilities in Venice and Miami, Florida.

BUILDING CODE OVERVIEW: Impact resistant windows and doors came to market in the Southeastern U.S. after

the record damage of Hurricane Andrew (1992) in Florida. Following the hurricane, Florida gradually implemented

stricter building codes, and in July 2001 made it a law requiring homes in hurricane prone areas to protect every

exterior opening (windows and doors) with either shutters/boards placed over the openings or to use impact-

resistant products that wouldn’t shatter when hit with high-velocity objects. The Florida Code of 2010 required

strict enforcement of State Approved products in addition to mandating more energy efficient windows and doors.

INVESTMENT CASE:

PGT is the dominant market share leader with a premium brand. As one of the early creators and original

pioneers of impact-resistant products, PGT has significantly greater market share and is 5x the size of its nearest

regional competitor. After the September 2014 acquisition of its largest competitor-CGI, the company extended its

market share to approximately 60% in Florida while also greatly reducing the frequency of discounted pricing and

promotions. PGT has leading brand recognition for its premium quality products, most notably the PGT WinGuard

impact resistant windows and doors. The company offers the broadest line of customized impact resistant

windows and doors in the market. It is also well known for having best in class customer service and an unmatched

ability to deliver custom products on time, leading to strong relationships with loyal distributors and construction

developers. The company currently has installed over 3.5 million units with zero reported failures. PGT’s premium

brand caters towards the middle to high end of the housing market which has seen a stronger recovery in new

home construction (both in pricing and volume) and is also more likely to use the more aesthetically-pleasing

impact resistant products over metal shutters in the repair and remodeling (R&R) market.

Favorable industry dynamics give PGT astrong and defensible competitive position in a very niche and lucrative

market. Since impact resistant products are only in demand in hurricane prone coastal areas, largely Florida, PGT is

insulated from competition with national building supply manufacturers as the niche market is too small for them

to target. Additionally, the manufacturing process to make impactresistant windows is more complex, and as a

result, not worthwhile for the national peers to develop the specialized expertise. Therefore, competition in the

impact resistant market is limited to much smaller regional manufacturers. New entry attractiveness is fairly low as

barriers are created by PGT’s strong distribution relationships and the long and costly process to receive Florida

building code approvals for impact resistant products. Also, PGT’s management sits on boards to set Florida

building codes and to actively create minimum impact standards for the industry. As a result, the company is able

to both dictate industry standards for impact resistance and anticipate code changes for energy efficiency in

advance. It has more Miami-Dade County Notice of Acceptances than any of its competitors. Because of the

company’s dominant competitive position, PGT has much higher growth, margins, and returns on capital

compared to its publicly traded peers, including gross margins that are near double its closest peers.

The Florida housing market recovery will drive outsized growth for PGT for the next 3-5 years. New home

construction and home repair and remodeling (R&R) drive demand for PGT’s products in the Southeastern U.S. As

the 3rd most populous state, Florida cansupport significantly higher new housing starts over the next 3-5 years as pent-up demand, rising home prices, a growing Florida population, low inventory, low interest rates, and an improving economy drive the housing industry forward. I believe the Florida housing recovery is still in the middle

stages. Florida single-family new housing starts were only 56K (+4% yr/yr) in 2014, which is 50% below the 20-year

historical average of 114K starts. However, last cycle’s housing boom likely inflated averages beyond what is

sustainable over the long run. Applying a conservative 25% discount to the 20-year average results in a normalized

historical average of approximately 85K housing starts, which is still 52% higher than the 56K starts in 2014. As new

construction in Florida increases towards its normalized mean, housing starts are expected to grow at a 13% CAGR

between 2012 and 2016. Given PGT’s dominant competitive position and its strong relationships with developers,

sales to new home construction should grow much faster as the company captures additional market share.

Revenue mix between the two markets widely varies depending on the pace of new home construction starts.

Recently in Q2FY15, new residential construction accounted for 40% of sales and grew 39% yr/yr (R&R sales

represented 60% of sales and grew 15% yr/yr). While this is up from FY 2014 in which new construction

represented 38% of sales or $110Mand grew 52% yr/yr (R&R represented 62% of sales or $196M and grew 17%

yr/yr), new construction sales still has a long runway to go before matching its 2005 peak in which new home

construction sales were $223M and represented 67% of total revenue. On the flipside in 2011, new construction

sales were at a low of $40M and represented only 24% of total revenue. Gross margins for new home sales are 5-

7% lower than R&R, which means every 10% shift in mix results in a .5-.75% change in overall gross margins.

Rising secular demand for PGT’s productsis being driven by stricterimpact and energy efficiencybuilding codes

and greater awareness of customer value. Increasingly stringent building codes (see INDUSTRY ANALYSIS) are

driving secular demand for PGT’s impact resistant products as minimum impact standards increase, enforcement

becomes stricter, and counties under mandate expand. For example, the Florida Building Code of 2010 added 5

additional counties under mandate and expanded PGT’s TAM by 10-15%. Also beginning in 2010, Florida Building

Codes have increased the energy efficiency requirements in homes. As a result, PGT’s WinGuard product line,

which is energy efficient, has seen its value proposition dramatically increase over the alternative of using shutters.

The total costs of WinGuard are lower than shutters after accounting for the extra costs of higher-priced energy

efficient windows, shutters, labor for installation, and discounts on insurance premiums. Insurance providers give

large discounts, in some cases up to 50% on annual premiums if impact-resistant products are used for the entire

home. This leaves room for further price increases for PGT. Also as housing prices have risen, owners have been

more incented to invest in impact resistant products as it comes with tangible benefits and increases home value.

In addition to better safety, impact resistant windows are a much more aesthetically pleasing option compared to

shutters. Also, distributors regularly highlight the value proposition (safety, energy efficiency, insurance, and home

value) and the economic benefits of impact resistant products in their sales pitches, which was not the case before

2010. Furthermore, PGT has been increasing itsmarketing andadvertising spending to gain share in the R&R

markets. Over time, consumers and distributors have become much more aware of these benefits resulting in

increased demand. This is especially evident as PGT’s R&R sales have grown at 29% and 17% y/y in 2013 and 2014

respectively.

The impact-resistant window and door market in Florida is growing and under-penetrated. PGT competes in the

largest impact-resistant window and door residential market with a TAM estimated at over $1 billion and growing.

Over 60% of estimated Florida households live in “code-mandated” areas with approximately only 30%

penetration for impact resistant products, leaving a large and under-penetrated market opportunity for PGT.

Impact penetration increased from approximately 10% in 2003 to 25% in 2007. Florida is PGT’s largest marketand

accounted for approximately 88% of its total sales in FY 2014. As developer and consumer preferences shift

towards impact resistant products, PGT is almost certain to outperform the market’s growth and further capture

additional share in the new home construction and R&R markets due to its competitive advantages. According to

local distributors, impact resistant windows are gaining significant share as penetration rates are up to 75% for

new high end construction in code mandated areas. In the current new home construction cycle, there is also

much higher demand upfront for impact resistant products compared to the last housing boom back in 2006 in

which code mandates were less stringent and impact-resistant product benefits were less well understood.

PGT’s recent capital projects and operational improvements are driving lower long term operating costs and

higher margins. In order to meet rising demand for impact and energy efficient products, PGT has been increasing

capacity to manufacture its own finished glass through the addition of a 100K sq. ft. plant completed in late 2014.

Glass manufactured in house leads to a lower cost of glass, better lead times, and higher gross margins. The

expansion will reduce dependence on outsourced glass and has increased internal capacity by 25% so far. After the

planned addition of new equipment in early 2016, all internal needs for glass capacity will be met outside of peak

periods (in which 3rd parties will continue to be used). The company has 25% additional floor space in its new plant

to add more manufacturing equipment if needed. PGT is also improving operational efficiency through better

employee training and development programs. As a result of the initiatives, gross margins for FY 2015 are

expected to improve by 2% from 30.3% in FY 2014. The additional equipment coming on line in 2016 will allow CGI

to manufactureall of its glass in house (CGI previously relied on outside providers for all finished glass), which

should also driver margins higher.

INDUSTRY ANALYSIS

Florida building code history. After the record setting damage from Hurricane Andrew in Florida (1992), building

codes required windows and doors to be protected along hurricane-prone zones. By 2001, more stringent

standards were put in place requiring by law to have home openings protected by either metal shutters placed

over windows or to use impact-resistant products. The building codes required minimum standards of debris

protection in which the shutters, windows, and doors must be able to withstand a “9-pound 2x4 lumber missile

striking end on at 34 mph”, with even stricter standards in higher wind zones. The Florida Building Code of 2010,

the toughest to date, required that the shutters, windows, and doors as well as the installation processes be

officially State Approved for meeting the strict minimum impact standards. Additionally, beginning with the codes

in 2010, homes were required to become more energy efficient in part by using insulting windows and doors. The

minimum impact and energy efficiency standards continue to get more stringent over time, with recent emphasis

on energy conservation. PGT’s management is actively involved in creating industry standards and building codes,

and it has more Miami-Dade County Notice of Acceptances than any of its competitors. The company also offers

training courses in order to educate more than40,000 customers, installers, architects andbuilding code officials

on industry standards. From an insurance perspective, significant discounts on premiums are offered as impact

resistant products are the safer option over shutters. Completely sealing a home froma hurricane is absolutely

critical in protecting both the house’s structure and interior. Once an opening is created, most often through

windows/doors, intense pressure builds inside the house as the hurricane winds try to find another opening. This is

what causes roofs to be blown off and walls to collapse, in addition to having the interior blown to pieces.

PGT operates in a niche market in which industry competition is moderate. PGT primarily competes with small

regional manufacturers of impact resistant products. Because of its much greater size, market share, and financial

resources, regional competitors are not a big threat to PGT. When it comes to bidding on larger projects for

national builders and high-rise condo’s, the regionals often lack one of the following: manufacturing capacity,

breadth of customized products, service levels, or marketing support. PGT’s publically traded national building

supply competitors include Masonate, Ply Gem Holdings, Masco, and Fortune Brands. These larger national

competitors focus on non-impact resistant products and do not strategically target PGT’s niche market, as impact

resistant products are very region specific to hurricane-prone areas. Ply Gem is a North American manufacturer of

windows and exterior building products. Ply Gem’s vinyl and aluminum windows make up approximately 55% of

total sales; however, like other PGT competitors, Ply Gem does not focus on impact resistant or the same

geographic market as PGT. Masonite is a global manufacturer of doors focusing on interior and exterior doors for

residential and commercial uses. Fortune Brands Home and Security is a large global manufacturer of home and

security products. Doors make up only 10% of the company’s sales and contribute the lowest operating income

and margin amongst all business segments (including cabinets, plumbing, and security). Masco manufactures and

installs home improvement and building products. Windows and doors make up only 12% of the company’s

revenue, and sales are concentrated in the western U.S.

Buyer power is fairly weak as the regional distributor/dealer market is very fragmented. PGT sells to a very

fragmented and diverse customer base made up of over 1,000 regional window distributors, building supply

dealers and distributors, and window replacement dealers and enclosure contractors. PGT has good pricing power

due to its leading market share and the stronger value proposition of its products. PGT has increased pricing 3

separate times since 2011, and each time by 3-7%. PGT’s largest customer accounts for only 4% of net sales, and

the top 10 customers account for only 20% of net sales. Despite a challenging home construction market over past

several years, there has also been very little turnover in PGT’s top 10 customers. While PGT does not usually sell

directly to homebuilders outside of large projects, demand for its products is a function of the relationships with a

number of national homebuilders that are involved in the design of PGT’s windows and doors.

Barriers to entry include a required expertise in the highly technical, time consuming, and expensive regulatory

approval process for impact resistant products. While direct start-up costs are not particularly high, PGT has

strong and long-standing relationships with the dealers, architects and homebuilders that will be hard to

penetrate. PGT also adds significant value to its distributors and dealers by ensuring on-time delivery for its high

quality and vast number of customized products. The same cannot be said of competitors with smaller portfolios

and less capacity for impact resistant products.

The primary manufacturing materials include aluminum and vinyl extrusions, glass, and polyvinyl butyral. While

PGT has agreements with its suppliers in many instances, these agreements are generally terminable by either

party on limited notice. All of the needed materials are typically readily available from other sources. The company

also has a long term favorable agreement with a large third party glass manufacturer, Cardinal.

COMPANY STRATEGY, BUSINESS MODEL, AND PRODUCTS

PGT’s top strategic and capital allocation priorities include investing in growth through internal expansion and

acquisitions, investing in its products and brand, growing market share, and improving operational efficiencies.

In order to maintain its premium branding and leading market position, PGT invests in its products to offer the

highest-quality impact resistant windows and doors along with best in class customer-service. PGT’s products

come with broad customization options and industry leading energy efficiency. The company’s flexible

manufacturing capabilities along with its history of pioneering new designs allow it to continually evolve to meet

customer needs. PGT claims to have installed over 3.5 million units with zero reported failures due to impact. As

far as acquisitions, management stated they would primarily consider opportunities that would drive higher profits

without lowering overall margins, which implies they would not go after non-impact targets outside of their core

geographic markets. PGT also invests in its people through better training in order to improve operational

efficiency. Additionally, PGT added a commercial sales force in 2013. The company does not have a large presence

in the commercial market, which is estimated to be worth over $1 billion for impact resistant products. PGT’s

products can be adaptedto fit hotels, large condo’s, office buildings, and other retail buildings fairly seamlessly.

The commercial market opportunity is large but also very competitive.

CGI acquisition. PGT’s acquisition of CGI Windows and Doors in October 2014 expanded its market share and

impact product offerings. CGI was PGT’s largest competitor in its largest market (South Florida). CGI targeted the

premium and ultra-high-end commercial and residential markets, with a slight emphasis on the former. CGI had an

end market mix of approximately 50%/50% between the new residential and R&R markets. With the acquisition of

CGI, PGT added manufacturing capacity in Miami, Florida, one of the company’s strongest markets, and also

improved its distribution on the west coast of Florida. Additionally, after the acquisition, PGT took out its largest

and in some cases only competitor for bidding on large-scale residential development projects. CGI also offers

multiple cross selling opportunities, higher EBITDA margins (high 20’s% post-synergies versus PGT’s of high teens),

and tax operating loss carry-forwards of $6M. PGT paid $111M for a 9-10x trailing EV/EBITDA multiple (pre-

synergies) for CGI and 8x post-synergies. Prior to the acquisition, CGI had approximately $40M in annual sales and

growing about 25% per year. The acquisition was expected to be accretive at time of purchase.

New plant expansion. In late 2014, the company added a new 100K square foot glass manufacturing plant, which

has increased capacity by 25%. The first phase of the capacity expansion, which has been completed, includes

cutting, tempering, and insulating glass in the new facility. In Q1 FY 2015, PGT brought on its fourthautomated

glass insulating line to meet higher demand for its energy efficient windows. The second phase of the expansion,

which is projected to be complete in Q3 2015, includes adding more equipment to increase insulating and

laminating capacity. PGT is currently planning to start up the third laminating line in 2H FY 2015.

PGT has vertically-integrated manufacturing operations and best in class lead times. The manufacturing process

to make impact resistant and energy efficient windows involves multiple additional phases for lamination and

insulation, making it more complex than producing normal non-impact windows. PGT has been expanding

manufacturing capacity to produce the majority of its glass needs internally. In-house glass processing (cutting,

tempering, laminating, and insulating) has lower costs and reduced lead-times compared to using third parties. In

house manufacturing is typically used for custom glass; whereas, third parties are usedfor standard rack glass

when needed. In 2015, PGT consolidated outside glass providers to just one company and re-negotiated a long

term deal with very favorable terms. It has best in class lead times and inventory turns of 12.9x in 2014 compared

to a peer average of 7.2x. The company uses synchronous flow manufacturing that enables more efficient

production including custom made-to-order products that can be delivered in 1-2 days. Product design and testing

are also done completely in house. Product deliveries are made by company trucks and employee drivers.

PGT has more impact SKUs than any other manufacturer with products ranging from niche residential to larger

commercial units. Impact resistant sales have increased as a percentage of total sales from 61% in 2005 to 80% in

2014. Window sales make up 60% of sales while doors make up 40% of sales. New product lines recently launched

in January 2015 include a new vinyl WinGuard and EnergyVue. The new vinyl WinGuard has the industry’s highest

ever impact resistant pressures, leading energy efficiency capability, and largest number of design configuration

options along with greatly improved aesthetics. PGT put a lot of technology advancements into the new vinyl

product line along with designing it to have reduced labor and material costs. As a result, the 5-7% margin

differential between the new vinyl and aluminum WinGuard should reach parity within the next few years as

aluminum lines are expected to drop in demand after the new energy code changes. The new EnergyVue vinyl

windows are targeted at the non-impact energy-efficient market.

FINANCIAL ANALYSIS:

Revenue has grown at a 23% CAGR in the last four years. PGT’s sales are highly cyclical and closely tied to the

Florida single-family residential new home construction and R&R markets. Total revenue has organically grown at a

23% CAGR between 2011 and 2014 as a rebound in the Florida housing market has lifted new home construction

sales at a 40% CAGR in the same period. PGT also increased penetration in the R&R market and grew R&R revenue

at a 16% CAGR between 2011 and 2014. Employee headcount at the end of Q2 FY 2015 is approximately ended at

2,200, which is up from 1,000 at the beginning of 2013.

Gross margins have declined in FY 2013-14 due to a significant increase in manufacturing overhead, capacity

constraints resulting in more use of third party glass, and rising material costs, particularly aluminum. As the

company hired 300 new manufacturing employees in 2013 and 500 new overall employees in 2014, bringing its

total to 1,900 employees, margins were pressured due to the time and costs required to train the new employees

(9-12 months till productive). Gross margins are still much higher than peers (31% versus 24% peers). Positive gross

margins drivers include: lower cost of glass from internal glass processing; improvement in scrap and

manufacturing efficiencies; leverage from increased volume; product mix towards aluminum and R&R sales as

opposed to vinyl and new construction sales. Negative gross margin drivers include: increased use of outsourced

glass; higher aluminum and material costs; increase in overhead to support demand.

EBITDA margins have increased from a low of 5% in 2011 to 14.4% in 2014. Margins have increased due to better

operating leverage from higher volume sales and an improved cost structure from re-structuring actions taken

during the downturn. Projected sales for FY 2015 are expected to be $393M, above the company’s previous all-

time high of $327M in 2005. PGT restructured during the 2008 downturn and now is operating more efficiently

with 200 less employees (or 10% fewer employees) for a higher level of revenue. Current EBITDA margins are

much higher than peers (15% versus 10% peers).

Normalized EPS has grown at a 58% CAGR since 2012. Since the housing market turned around after 2011,

normalized EPS has increased to $0.43 in 2014 and is expected to grow at a 31% CAGR over the next three years.

It’s worth noting that net income in 2013 had a one-time benefit for the release of valuation allowances on

deferred tax assets, and 2014 had several non-recurring items related to the extinguishment of debt for previous

credit agreements and interest rate swaps.

PGT generates sufficient free cash flow to internally finance growth. With its industry leading margins and low

maintenance capex requirements, PGT generates sufficient FCF to internally finance itscapital needs for growth

and maintenance. The large and under-penetrated impact-resistant market provides PGT with re-investment

opportunities at high rates of return. FCF reached an all time high of $19.4M in 2012, above the previous cycle’s

peak of $14.3M due to improved fundamentals. FCF margins have improved by 100 bps to 4.5% since the

downturn and should continue to expand as long term margins improve and the largest share of PGT’s growth

investments in land and building expansions are complete. First phase of plan expansion included $2M onland,

$7M on building, and $5M on equipment. Capital expenditures on average run at 2-3% of revenue during normal

conditions, but increased to 6% of revenue in 2014 due to land/building expansions and IT investments.

Management allocates capital effectively. Management has prioritized its capital allocation towards re-investing

in growth, e.g. manufacturing capacity expansions and CGI acquisition, and secondarily in cost savings initiatives,

e.g. ERP/IT investments. ROIC has increased from 7.9% in 2012 to 8.5% in 2014. Returns should continue to

improve going forward. Management has also opportunistically returned cash to shareholders. During 2014, PGT

repurchased 93K shares at an average price of approximately $10.75 per share (2015 share price range has been

$8.47 - $16.28). Since the current $20M repurchase program was enacted in 2012, PGT has repurchased a total of

2.1M shares at an average price of $5.30. The company has approximately $8M remaining in its current program

and has a current total of 47.75M common shares outstanding. PGT does not pay a dividend.

Debt. The company’s balance sheet is strong allowing PGT the flexibility to make additional large acquisitions.

Concurrent with the CGI acquisitionin 2014, PGT refinanced previous debt of $79M into a new senior secured

credit facility with more favorable terms, consisting of a $200 million term loan and a $35 million revolving credit

facility. Current net debt/EBITDA is 2.3x as of Q2 2015 and debt as a percent of total assets is 58%, which is down

from 3.5x and 62%, respectively, at the end of 3Q FY14 immediately following the CGI acquisition. Management is

comfortable with net debt up to 3.5-4x EBITDA. In 2013, $50M of debt was raised to fund share repurchases.

Outlook. Total revenue should grow by a 15% CAGR between 2014 and 2017, including 10% organic growth in

2016, driven by a strong cyclical rebound in new home construction and continued secular penetration gains in

R&R. Over the short and medium term, new home construction sales will be closely tied to growth in single family

permits while R&R growth is expected to grow at least 6% yr/yr in the short and long term. I believe there is

potential for PGT’s growth rates to outperform expectations if the Florida housing market recovers faster than

expected, cross selling synergies from CGI are better than anticipated, or if there is faster adoption of the higher

margin new vinyl WinGuard product line.

Compared to last the cycle and housing boom in the 2000’s, growth, profitability, and returns are set to be

significantly higher as PGT has greater market share, better pricing power, higher leverage due tothesecular

rise in impact resistant products, and an improved cost structure from structural changes made during the last

downturn. Gross margins for FY 2015 are expected to improve by 200 bps to 33% as a result of increased internal

glass capacity and elimination of new hire and equipment start-up costs. Over time margins should see another

100-150 bps of improvement as the new line of higher margin vinyl WinGuard replaces aluminum editions. I

believe there is room for outperformance onthe gross margin line due tobetter pricing on large projects, higher

volume leverage, faster efficiencies realized from expanded capacity, andgreater synergies from CGI which relied

on only outsourced glass and had less sales distribution in various parts of the Florida market. EBITDA margins are

expected to increase from 15.1% in FY 2014 to 20% exiting FY 2015 driven by higher CGI margins (high 20% range

versus PGT’s high teens), operating improvement initiatives (improved IT and ERP systems), and profitable returns

on capital projects. Management set a 20% EBITDA margin target exiting Q4 2015, which is above consensus

expectations for a 18.2% margin in Q4 and leaves room for potential outperformance. The 20% EBITDA margin

target would also be better than the all-time high set back in 2003 at 16.7%.

Problems with finances are an issue in the past. PGT had to undertake two rights offerings in 2008 and 2010

following the large housing downturn and several rounds of restructuring charges. The company fixed its structural

issues by closing two separate plants in North Carolina in 2010 and 2011 and re-focusing on just its core Florida

market. Also in 2008, PGT took a large goodwill impairment write-down from a previous acquisition of an energy

efficient and insulating windows business. PGT also implemented a more aggressive aluminum hedging program

following record aluminum prices in 2009 that occurred simultaneously with a massive housing downturn.

VALUATION:

Shares of PGT currently trade at a P/Emultiple of 20.8x on 2015 EPS and 16.5x on 2016 EPS,whichisbelow the

historical 10-year medians of 23.9x and 18.5x on FY+1 and FY+2 EPS, respectively. Given mid-cycle housing market

characteristics, applying a historical mid-cycle multiple to shares is appropriate. However, I believe shares deserve

to be valued off of a multiplethat is 10-15% higher thanthe historical median for 3 reasons: better growth

prospects due to a secular rise in impact resistant products, a stronger competitive position in a niche market

relative to the past, and better margin and profitability profile. Applying a P/E multiple of 20.8x (or a 12.5%

premium to the median mid-cycle multiple) to 2016 EPS results in a price of $16.45 (25% above current price).

PGT trades at a forward P/E multiple of 17.7x, compared to the Russell 2K’s 19.7x forward multiple. PGT currently

trades at a 10% discount to the Russell 2000, which is well below its 10-year historical premium of 26%.

MANAGEMENT AND GOVERNANCE:

PGT has a strong management team with over 100 collective years of experience in the industry. The management

team is responsible for pioneering the industry and sits on numerous boards to help create impact-resistant

standards and contribute to Florida Building Codes. The company’s management also has 46 collective years of

experience at various Fortune 500 companies. Management was able to produce positive EBITDA through every

quarter during the great recession.

Compensation and stock ownership. Directors and executives as a group currently own approximately 11% of

total shares outstanding as of April 2015. Executive compensation is aligned with shareholder interests. Base salary

for top executives istargetedto accountfor less than 50% of total compensation(lower ranking executives at a

higher percentage of base to total). Cash incentive plans are targeted to be between 40-100% of base salary and

are based off of performance-based measures for sales, EBITDA, and EBITDA margin. Long term incentive RSU’s is

targeted to be between 40-150% of base salary (higher for top executives) and is based off of achieving EBIT

performance targets. Since non-base salary is mostly linked to achieving absolute financial goals, shareholders

need to be cognizant of acquisitions that may decrease shareholder value.

Rodney Hershberger – CEO, Chairman, co-founder of PGT – has been with PGT since its founding in 1980.

Hershberger became Chairman in February 2014 and became CEO in 2005. He served in various executive roles

prior to these appointments. He has over 30 years of experience in the industry and has been recognized by the

Board for his knowledge, skill and reputation and honest leadership in driving great value to shareholders.

Hershberger owns 4% of outstanding stock as of April 2015. Jeffrey Jackson – President and COO – has been with

PGT since November 2005 and helped lead the company through its IPO in 2006. Jackson has been in his current

since May 2014. Prior to this he held various executive roles in other manufacturing and industrial companies.

Brad West – CFO - Joined PGT in 2006 and was appointed CFO in 2014. West has 23 years of financial and

accounting experience including 17 years of management experience at manufacturing organizations.

RISKS: PGT is highly sensitive to the Florida housing market and general economy. If the housing market recovers

more slowly than expected or even suffers another decline, then sales of PGT will be negatively impacted.

Additionally as the company has been increasing its own manufacturing capacity, fixed costs are now higher

resulting in negative operating leverage during slowdowns and downturns.

PGT is exposed to rising costs in raw materials, including aluminum, vinyl extrusions, glass, and polyvinyl butyral.

Raw material costs vary depending on supply and demand conditions, and the price of oil and aluminum. The

impact from oil price varies as a lower price positively impacts raw material costs but also increases fuel costs for

PGT’s truck fleet. Rising material costs may also offset benefits to gross margins from the expanded plant capacity.

Competition from national building product suppliers can increase. The high margin potential of impact resistant

products in the Florida market could attract the attention of larger competitors. While these competitors do not

currently focus on PGT’s niche market, they have the financial resources to enter and compete in the market if

desired.

Leverage has increased substantially since the acquisition of CGI. Net Debt to EBITDA is approximately 2.3x, which

is slightly higher than the peer median of 2.0x. Debt to Assets has increased from a low of 25% in FY 2012 to 58%

in Q2 FY2015. A significant cyclical slowdown may diminish the company’s ability to meet its debt obligations.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

Rising new single-home construction starts, new residential permits, and existing home sales.

show sort by

			2015	2016
Price:	13.65	EPS	0.64	0.81
Shares Out. (in M):	49	P/E	21.3	16.9
Market Cap (in $M):	655	P/FCF	36	18
Net Debt (in $M):	146	EBIT	61	75
TEV (in $M):	801	TEV/EBIT	13.2	10.7