Simpson Manufacturing stock doubled in value; It can double again

Simpson Manufacturing NYSE:SSD The stock price more than doubled in 2023 and is on track to double again over the next few years. The company is supported by a dual tailwind, with favorable real estate market dynamics and a growth trend. The bottom line for investors is that Simpson continues to outperform its target market and its competitors, while delivering value to shareholders. This story is expected to continue this year.

Simpson Manufacturing invests in growth: Fourth quarter results are mixed

Simpson Manufacturing reported a mixed quarter in which revenue strength was offset by profit weakness. Usually, this combination is not good for stock prices, but in this case the culprit is growth investing. Increased spending on headcount, wages and working capital is tied to expansion and production indicating increased leverage as 2024 progresses. Assuming the Fed maintains expectations of cutting rates, activity of Simpson will likely accelerate by the end of the year, and there is already a prospect for accelerated results.

Analysts expect Simpson’s revenue growth to accelerate to nearly 5% this year and 6% next year, but they are underestimating the company’s strength. The shortfall in housing inventory supports a strong outlook for construction in 2024, with NAR forecasting 13% growth in new home sales. Assuming the company can sustain its market-leading performance, it should beat revenue forecasts by a wide margin.

Analyst earnings forecasts are also low. Analysts expect sequential growth throughout the year and year-over-year growth returning quarterly by the end of the year, but the forecast for the fiscal year is contractionary. The forecast for the first quarter is particularly light, with an expected earnings contraction of almost 12%, while Simpson expects around 600 basis points of operating margin expansion in 2024 compared to the fourth quarter result.

Simpson’s fourth-quarter results were compromised; Fiscal year cash flow is robust

Simpson’s fourth-quarter results were hurt by investments in growth, but cash flow remains solid. The company reported a $30 million increase in operating profit, about 7.5%, and an increase in net income that supports a healthy share repurchase and dividend outlook. The dividend is small, at 0.55% of the share price, but safe, at only 12% of earnings. Distribution is also growing and is heading towards the fourth consecutive annual increase, which should arrive with the next declaration. This is expected in April.

The company uses stock-based compensation, but buybacks were enough to offset the impact in 2023. The board of directors approved $100 million for buybacks, and $50 was used in the fourth quarter, reducing the count on a annually by 0.03%. This is a small amount, but buybacks are expected to continue into 2024 and could increase by the end of the year. The company has $50 million left at current clearance, about 0.6% of market capitalization with shares near $192.50, and the balance sheet is a fortress. Leverage is low at 17% of assets and 27% of capital, with a capital increase of 20% and expected to improve again in 2024.

Analysts are taking Simpson to new highs

There aren’t many analysts covering Simpson Manufacturing, but the few who rate it a Moderate Buy are leading the market higher. The consensus price target assumes fair value with shares near $192.50, but the most recent revision, issued by Baird following its fourth-quarter release, includes the new high target of $205. That’s about 6% higher than current stock, far from the 100% possible, but a significant target for two reasons.

The first is that the SSD has been trending strongly and is now consolidating, and the second is because a move to new highs would indicate a continuation of the current trend. This trend is worth $50 to $70 in the short term, with an upside of around 30% – 50% and over 100% in the medium to long term. Coincidentally, institutions own about 90% of the stock and have been buying on the balance sheet quarterly for the last three years.

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