Great work! You have a real skill for clear and concise analysis. Any thoughts why Atkore sales, and volume in particular would not grow in line with Eaton? I assume their products are sold in conjunction and have similar demand?
Thanks for the kind words! They mean a lot. If I can't make the case clear and concise, then I don't understand the business well enough.
On Eaton vs Atkore - Atkore's volume growth may be similar to Eaton's, but Eaton is much more diversified both in product lines and geography so it's not a direct comparison.
Atkore generates 90% of revenue in the US and the sales are mainly conduit and cable management products.
Eaton has an electrical segment, which sells conduit and cable management, but it also includes things like transformers, lighting, switchgear, panel boards, and electrical enclosures. They also sell an industrial software that allows control and monitoring of the power system in commercial applications. About 1/3 of Eaton's electrical sales are outside of North America as well.
In addition to the electrical segments, Eaton has an aerospace segment, vehicles segment, and eMobility segment.
That said, Eaton is guiding for roughly 10% organic growth in the electrical segment in North America. Atkore may see something similar in volume of product sold, but 10% growth feels towards the top end to me. I see labor being the limiting factor in how quickly Atkore can grow their volume - you're not going sell product faster than the construction industry can use it. Unemployment remains low and contractor backlogs are still healthy.
For me, growth in volume isn't the sticking point. How quickly margins fall and where they ultimately settle is. Analysts are expecting lower revenue and earnings for Atkore this year, meaning they expect the margins to fall faster than the sales volume grows.
Absolutely do your own work. Atkore could be a great investment that I'm missing, but my goal isn't to get every possible great investment. It's to not lose money by only investing in no-brainers that I understand.
No idea if there's any truth to it. The elevated margins are exactly the reason I'm staying out of Atkore. If it is true, I agree with the author of the linked article that Atkore and the others will "have material downside if pipe prices normalize, before any impact from fines or damages."
As far as the management question goes, I agree with Buffett:
“We can’t be perfect but we can try to be. As I’ve said in these memos for more than 25 years: ‘We can afford to lose money—even a lot of money. But we can’t afford to lose reputation—even a shred of reputation.’ We must continue to measure every act against not only what is legal but also what we would be happy to have written about on the front page of a national newspaper in an article written by an unfriendly but intelligent reporter.”
I don't want stories about my managers engaging in price fixing on the front page of the NYT or WSJ. As I mentioned in my piece, the fact that none of the management was buying shares at "cheap" prices was one of my red flags on Atkore.
I do have a hard time with seeing labor as the only constraint. The hyperscalers are building their data centers in multiple different countries with different labor pools. Does Atkore not sell to them?
Not much. From Oppenheimer's Industrial Growth Conference in May:
"So we're a mainly U. S. Based company about a little under a $6,000,000,000 market cap. In our primary markets that we serve, we're a manufacturer of what I would call electrical infrastructure products... We go through the electrical distribution channel in the United States,
about 10% of the business is outside of the U. S."
Could be something. It's not overly clear to me exactly what Waltz means. On the off-site manufacturing, Atkore will build certain parts of the electrical infrastructure and ship it to the site - much like homebuilders will build homes in pieces in their factories, then assemble them on-site. It sounds like this is what he's referring to. Again, he says "mostly a U.S. story" but who knows. I'm not convinced that labor won't be the bottleneck for the speed of growth in places like Europe as well. Unemployment there is low and they're building infrastructure and green energy projects faster than the U.S. This is part of why Atkore is in my too hard pile. Just because it's too hard for me, doesn't mean it should be for you though.
I’ve thought that I “should” have a standard structure, but the truth is I really don’t. When I research a company there are things I always look at like the business, the moat, the management, the industry, the competition, and the valuation. Sometimes it’s all relevant to the case, sometimes it’s not. Sometimes there are unusual things I have to look at.
By the time I write an article, I understand the case well enough to put it into an argument for my conclusion. I usually just structure them to try to make everything flow and be as clear as possible.
90% of sales are in the US: "For each of fiscal 2023, 2022 and 2021, approximately 90%, 91%, and 90% respectively, of our net sales were sold to customers located in the United States."
Atkore sells into the electrical distribution channels. Hyperscalers are not their direct customers. Hyperscalers hire contractors to build data centers. Contractors buy conduit from electrical distributors. The distributors buy the conduit from Atkore.
So US data centers probably have Atkore conduit in them. Data centers in Europe probably have Legrand or Schneider conduit in them. Asian data centers probably have some other brand of conduit.
For Atkore, it doesn't matter who owns the data centers, it matters who builds them (and where).
Great work! You have a real skill for clear and concise analysis. Any thoughts why Atkore sales, and volume in particular would not grow in line with Eaton? I assume their products are sold in conjunction and have similar demand?
Thanks for the kind words! They mean a lot. If I can't make the case clear and concise, then I don't understand the business well enough.
On Eaton vs Atkore - Atkore's volume growth may be similar to Eaton's, but Eaton is much more diversified both in product lines and geography so it's not a direct comparison.
Atkore generates 90% of revenue in the US and the sales are mainly conduit and cable management products.
Eaton has an electrical segment, which sells conduit and cable management, but it also includes things like transformers, lighting, switchgear, panel boards, and electrical enclosures. They also sell an industrial software that allows control and monitoring of the power system in commercial applications. About 1/3 of Eaton's electrical sales are outside of North America as well.
In addition to the electrical segments, Eaton has an aerospace segment, vehicles segment, and eMobility segment.
That said, Eaton is guiding for roughly 10% organic growth in the electrical segment in North America. Atkore may see something similar in volume of product sold, but 10% growth feels towards the top end to me. I see labor being the limiting factor in how quickly Atkore can grow their volume - you're not going sell product faster than the construction industry can use it. Unemployment remains low and contractor backlogs are still healthy.
For me, growth in volume isn't the sticking point. How quickly margins fall and where they ultimately settle is. Analysts are expecting lower revenue and earnings for Atkore this year, meaning they expect the margins to fall faster than the sales volume grows.
Great points. I need to do my own work here but this is a solid ground to start on. Subscribed!
Absolutely do your own work. Atkore could be a great investment that I'm missing, but my goal isn't to get every possible great investment. It's to not lose money by only investing in no-brainers that I understand.
Sorry, another short attack shout. Any thoughts on price fixing? Is this true and if yes, does it show unethical management or just opportunistic? https://manbearchicken.substack.com/p/pipe-price-fixing?utm_source=substack&utm_medium=email
No idea if there's any truth to it. The elevated margins are exactly the reason I'm staying out of Atkore. If it is true, I agree with the author of the linked article that Atkore and the others will "have material downside if pipe prices normalize, before any impact from fines or damages."
As far as the management question goes, I agree with Buffett:
“We can’t be perfect but we can try to be. As I’ve said in these memos for more than 25 years: ‘We can afford to lose money—even a lot of money. But we can’t afford to lose reputation—even a shred of reputation.’ We must continue to measure every act against not only what is legal but also what we would be happy to have written about on the front page of a national newspaper in an article written by an unfriendly but intelligent reporter.”
I don't want stories about my managers engaging in price fixing on the front page of the NYT or WSJ. As I mentioned in my piece, the fact that none of the management was buying shares at "cheap" prices was one of my red flags on Atkore.
I do have a hard time with seeing labor as the only constraint. The hyperscalers are building their data centers in multiple different countries with different labor pools. Does Atkore not sell to them?
Not much. From Oppenheimer's Industrial Growth Conference in May:
"So we're a mainly U. S. Based company about a little under a $6,000,000,000 market cap. In our primary markets that we serve, we're a manufacturer of what I would call electrical infrastructure products... We go through the electrical distribution channel in the United States,
about 10% of the business is outside of the U. S."
In general, you are 100% correct. Look at the last question on the most recent earnings call though.
Could be something. It's not overly clear to me exactly what Waltz means. On the off-site manufacturing, Atkore will build certain parts of the electrical infrastructure and ship it to the site - much like homebuilders will build homes in pieces in their factories, then assemble them on-site. It sounds like this is what he's referring to. Again, he says "mostly a U.S. story" but who knows. I'm not convinced that labor won't be the bottleneck for the speed of growth in places like Europe as well. Unemployment there is low and they're building infrastructure and green energy projects faster than the U.S. This is part of why Atkore is in my too hard pile. Just because it's too hard for me, doesn't mean it should be for you though.
One more question: I love the style of your write up, do you have a specific pattern or format you use?
I’ve thought that I “should” have a standard structure, but the truth is I really don’t. When I research a company there are things I always look at like the business, the moat, the management, the industry, the competition, and the valuation. Sometimes it’s all relevant to the case, sometimes it’s not. Sometimes there are unusual things I have to look at.
By the time I write an article, I understand the case well enough to put it into an argument for my conclusion. I usually just structure them to try to make everything flow and be as clear as possible.
The structure and syntax is clearer than most sell side stuff I get. Probably all
Yes but does that mean 90% projects in the US? Or US based customers…
90% of sales are in the US: "For each of fiscal 2023, 2022 and 2021, approximately 90%, 91%, and 90% respectively, of our net sales were sold to customers located in the United States."
So hyperscalers building all over the world are still considered “located in the US” I would imagine
Atkore sells into the electrical distribution channels. Hyperscalers are not their direct customers. Hyperscalers hire contractors to build data centers. Contractors buy conduit from electrical distributors. The distributors buy the conduit from Atkore.
So US data centers probably have Atkore conduit in them. Data centers in Europe probably have Legrand or Schneider conduit in them. Asian data centers probably have some other brand of conduit.
For Atkore, it doesn't matter who owns the data centers, it matters who builds them (and where).