Tecnoglass Stock Has Promise, But For Now It’s A Hold (NYSE:TGLS)

Investment thesis

The share price of Tecnoglass has risen 87% in the past year, and there may be more room to grow—the Seeking Alpha system gives it a rare A+ for momentum.

But, do other fundamentals back up that bullish perspective? Yes, in the long term, but there are several caveats to consider. They include lower earnings this year and a share price that appears to be nearing a peak.

I rate the company a Hold, and expect the price to increase by just under 3% in the next year.

About Tecnoglass

In its Q2-2024 earnings release, the company described itself as, “a leading producer of high-end aluminum and vinyl windows and architectural glass serving the multi-family, single-family, and commercial end markets. Tecnoglass is the second largest glass fabricator serving the U.S. and the #1 architectural glass transformation company in Latin America.”

Among its main customers are architects, building owners, general contractors, and glazing contractors. No single customer accounted for more than 10% of revenue in 2023.

Manufacturing is done in a 5.6 million square foot facility in Barranquilla, Colombia, which it argues provides it with “efficient access” to nearly 1,000 customers in North, Central, and South America.

Its major market is in U.S., which represents 95% of total revenues, and within the U.S., it aims to expand beyond its base in Florida.

Tecnoglass reported in its 10-K for 2023 that it was first on Forbes Magazine’s list of America’s most-successful small-cap companies for 2024. It also reported that Glass Magazine named it the country’s third largest glass fabricator in 2023.

The firm also noted its commitment to quality and innovation. Since 2012, it has invested more than $500 million to “to enhance the efficiency and accuracy of our production lines, and ultimately to improve the quality of the products that we deliver to our customers.”

Despite all that, the Tecnoglass board announced in a June 25, 2024 news release that it is reviewing its strategic alternatives. That’s corporate-speak for “we’ll sell the company if the price is right” or take other action. It added there is no timetable or deadline, and that it would have no other comment on the matter until a decision is made or it decides more disclosure is needed.

At the close on September 13, the price was $66.83 and it had a market cap of $3.03 billion (making it mid-cap stock).

Competition and competitive advantages

Tecnoglass competes with local and international firms in a fragmented industry. It says competitive criteria are product quality, price, manufacturer reputation, breadth of product and service offerings, and production/delivery speed.

As for winning new customers and keeping existing customers, it points to the forming long-term relationships with window and door distributors and dealers, and by delivering a complete range of quality, customized products with short turnaround times.

On the pricing front, it claims an advantage by having its products made in Colombia. It also references its vertical integration and economies of scale.

Named competitors are Viracon (a subsidiary of Apogee Enterprises Inc. (APOG)), PGT Innovations Inc. (a subsidiary of MITER Brands), Cardinal Glass, and Oldcastle BuildingEnvelope.

To test those claims of competitive advantage, we will compare its margins with those of JELD-WEN Holding, Inc. (JELD), another major glass manufacturer, and the Industrials sector medians (all TTM):

Tecnoglass’ margins and return on common equity are much stronger than those of JELD-WEN and the Industrials median, suggesting it has at least a medium moat.

Tecnoglass Q2-2024 results

The company reported its second quarter 2024 results on August 8. Those results beat estimates for revenue by $368,000 and beat EPS estimates by $0.03.

• Total operating revenue fell from $225.788 million in Q2-2923 to $219.654 million in Q2 this year.
• Net income was also off, down from $52.565 million last year to $35.028 million this year.
• Basic and diluted income per share amounted to $0.75 this year, below last year’s $1.10.
• Shares outstanding were reduced from 47.647 million last year to 46.996 million this year.
• The backlog increased 29% year-over-year to $1.02 billion.

From the balance sheet:

• Total assets declined to $942.489 million from $962.712 million last year.
• Cash and cash equivalents fell to $125.805 million this year from $129.508 million in Q2-2023.
• Total liabilities also fell, to $256.660 million this year from $414.697.
• Long-term debt dropped to $140.058 million from $163.004 million last year.
• Total shareholders’ equity increased to $574.839 million from $548.020 million last year.

The net increase in cash rose from $104.686 million last year to $126.805 million this year.

CEO José Manuel Daes said, “We maintained strong momentum, capitalizing on the robust demand observed at the end of the first quarter to drive record single-family residential revenues in the second quarter. Our multi-family/commercial business improved sequentially and is expected to continue a positive trend as we move into the second half of the year and into 2025.”

He added that its attention to operational efficiencies and prudent working capital management led to robust cash flow despite the timing of seasonal tax payments made during the quarter. He said the company expected to “drive additional shareholder value in 2024”.

Overall, growth in both the residential and multi-family/commercial markets plus finding operational efficiencies means the company is growing its top line and reducing its expenses.

Dividends

Tecnoglass pays a small dividend, with a yield of 0.68% based on the September 13 closing price of $66.83. It has a forward annual payout of $0.44 and a payout ratio of 12.12%.

It began paying a dividend in 2016, and has increased it for three consecutive years after dramatically pruning it back in 2020:

In Q2-2024, it paid out $5.2 million in dividends.

Tecnoglass’ growth prospects

This 10-year chart shows the progress of revenue, EBITDA, and net income over the past decade:

The most striking part of this chart is the simultaneous decline of revenue, EBITDA, and net income, starting in the third quarter of 2023. Will that pullback continue or will these metrics rebound?

In the Q2 earnings call, CEO José Manuel Daes reaffirmed the company’s optimistic stance,

“We achieved record single-family residential revenues of $95.7 million and our second highest total revenue of $219.7 million. This demonstrates the resilience and adaptability of our business model in a complex macroeconomic landscape. These accomplishments reflect the strong demand and level of orders we saw towards the end of first quarter.”

He went on to say the multifamily commercial business provided sequential improvement, but was hurt by higher interest and mortgage rates during the second quarter.

The CEO backed up his optimism by noting that June orders were up over 60% over last year, and contributed to its record backlog of over $1 billion.

In the Q2 news release, Chief Financial Officer Santiago Giraldo said they expected full 2024 revenues to range between $860 million and $910 million, up from $833.3 million last year. At the midpoint, $885 million, it would represent about 6% growth. This would be all organic growth, as it was last year.

He also forecast that adjusted EBITDA would range between $260 million and $285 million; at the midpoint, this would represent an Adjusted EBITDA margin of about 31%, compared to 36.5% in full-year 2023.

Despite the management optimism, Wall Street analysts see a decline in EPS for this year, and a solid gain next year:

Valuation

For the first six years of the past decade, the Tecnoglass share price had been on a long, slow decline. That abruptly reversed as the COVID-19 induced economic slump began easing:

Since the reversal began, the price chart has shown a sawtooth pattern, with frequent peaks and valleys. At the moment, it appears to be building toward another peak.

The rise toward a peak seems consistent with the valuation grades Tecnoglass receives from the Seeking Alpha system:

I believe the stock is modestly overvalued.

Until 2022, price stayed close to normalized diluted EPS. And it appears they may get synchronized again:

Therefore, I believe it is reasonable to develop a one-year price target based on the two remaining quarters of this year and the first two of 2025.

Wall Street analysts expect an 11.86% decline in earnings this year and a 17.84% increase next year. Half of minus 11.86% is minus 5.93% and half of 17.84% is 8.92%. Adding them and dividing the sum by two gives us an average one-year earnings growth rate of 2.99%.

Adding 2.99% to the September 13 closing price of $66.83 gives me a one-year price target of $68.83.

That’s not much of a gain, but more bullish than the Wall Street target of $64.60, which is a 3.34% dip.

As noted above, the share price has been building toward a peak since late June, and I think it is likely to slip down again in the near future.

Because of my low earnings growth expectation over the next year, and the likelihood of another price slide ahead, I rate Tecnoglass a Hold. However, had the price been on a long decline instead of an upswing, I would have rated it a Buy.

One other Seeking Alpha analyst has posted a rating in the last 90 days, and that is a Buy. The Quant system also considers it a Buy, while all five Wall Street analysts have Strong Buy ratings, despite their price target.

Risk factors

Tecnoglass said in the 10-K that its success depends on three issues: developing new products and services; integrating acquired products and services; and enhancing existing products and services. Failure on any of these fronts could seriously harm its prospects.

The company may be sold or undergo some profound change after the board completes its strategic review. Normally we would expect a thriving company to sell for a premium over its share price at the time, however, that is never guaranteed.

It has only one plant, although another may be constructed in a joint venture with Compagnie de Saint-Gobain S.A. For now, though, any serious disruption at its one existing plant could lead to a complete loss of revenue and earnings.

Political and economic conditions in Colombia may have negative effects on the company’s operations and financial results.

Tecnoglass is incorporated in the Cayman Islands and its organizational documents include anti-takeover provisions. Investors might not be able to influence company decisions, and anti-takeover provisions may prevent other companies from offering a premium price for it.

Conclusion

There’s much to like about Tecnoglass Inc., including its low-cost manufacturing base, its growing revenue and cost controls. But EBITDA and earnings are not growing along with revenue. It also has made impressive price gains this year, but they may peak soon.

For now, most investors should watch and wait. For speculators and aggressive investors, it might pay to get in now in hopes of a sale that will attract a premium price.

I rate it a Hold for now.