Atkore Valuation Tempting, But Staying On Sidelines, Says JPMorgan

Although the valuation of Atkore International Group Inc ATKR is “tempting,” JPMorgan’s C. Stephen Tusa, Jr. believes the company’s margins are in a “temporary holding pattern,” this along with the waning cycle tailwinds keeps the analyst in the sidelines.

Tusa initiated coverage of the company with a Neutral rating and price target of $16.

Competitive Advantage

“We view the $5 billion Electrical Raceway market in which ATKR participates as stable, with competitive advantage driven by scale and service rather than IP,” the analyst mentioned.

Tusa believes Atkore International differentiates itself on these factors, as well as its industry leading market share, product breath and “advantaged” footprint.

Related Link: Deutsche Bank Initiates Coverage On Atkore International Gr At Buy

The company has high-end exposure to U.S. construction, which accounts for 70 percent of its sales. While the analyst views the non-residential market favorably, a deceleration phase appears to be underway.

Growth Potential

On the other hand, management has a robust initial track record on portfolio transformation, and Tusa expects it to “target adjacencies in Raceway, with an aim to mix to higher value areas.”

Tusa also noted Atkore International had been delivering impressive margins, growing from 5 percent in 2011 to 14 percent LTM in March 2016, driven by commodity deflating, pricing and purchasing initiatives.

“ATKR trades at a discount to US electricals, metals processors, and comps with similar end market exposures, but in line with private transaction multiples in the space. The discount may prove unwarranted if management can deliver on numbers,” the analyst added.