Atkore is the Growth Stock of the Week
The stock market has endured a pretty severe correction over the last few months. It’s the first real risk-off period since the brief bear market in February and March 2020.
The market and economy face serious challenges with inflation, heightened geopolitical risk, and a hawkish Fed. However, there are still opportunities for outperformance in sectors whose fundamentals continue to improve like industrial stocks. And, the sell-off has created an opportunity to buy these at a discount.
Today’s featured stock is an industrial stock with a very attractive valuation and significant upside over the rest of the year – Atkore (ATKR). The company also has pricing power and customers in industries that are growing at an above-average rate.
Read on to find out why ATKR is our featured stock…
ATKR is one of the top industrial suppliers in the US. It manufactures and sells industrial components and products like electrical conduits, metal frames, modular support, and mechanical pipes.
Throughout its history, the company has grown organically and through acquisitions, becoming a conglomerate of sorts. The company has thrived in the post-pandemic economy due to increased infrastructure spending, construction, and CAPEX. It’s also a beneficiary of inflation as it has pricing power due to its products being essential for projects but being a small part of the overall cost.
At its nadir, the S&P 500 was down nearly 15%, although we’ve recovered about a third of these losses.
The correction certainly has been challenging as investors are having to navigate a riskier environment. However, these corrections do create opportunities for outperformance, especially in companies with strong earnings growth.
And, ATKR is one of the most impressive stocks from this perspective. Last quarter, it had a 64% increase in revenue. It also had a similar jump in earnings to $4.58 a share from $2.70 in the same quarter last year. This was significantly above analysts’ estimates as well. It also saw margin expansion in all of its major units, indicating its ability to capitalize on inflation and that demand remains strong.
Despite this strong earnings momentum, ATKR’s stock price has been range-bound for most of the past year. This is creating very attractive valuations as the stock has a forward P/E of 10.7 which is nearly half of the S&P 500’s forward P/E.
Further, there is no dropoff in earnings that would justify such a multiple as the company sees 2022 EPS between $12.80 and $13.60 per share which was above analysts’ forecasts and the company’s previous guidance. Another positive is that the companies’ customers are in industries with strong prospects like infrastructure, construction, and tech infrastructure.
One factor that could wreck the bullish thesis is a slowdown in the industrial economy. And, one reason for weakness in all types of cyclical stocks due to the expectation that Fed hikes will slow growth. We are also seeing an increase in the odds of a recession in 2023.
While rate hikes will slow economic activity, the fundamentals in the industrial sector are strong enough to withstand this bearish headwind. Manufacturing remains firmly in expansion mode with the latest ISM data showing a 57.6 reading.
The biggest challenge is supply chain pressures which are already easing and should lead to even more capacity utilization in the coming months which is a positive tailwind for earnings in terms of higher revenue and lower costs. Another positive catalyst is that inventories remain quite low relative to historical norms.
The POWR Ratings rate ATKR a B which equates to a Buy. B-rated stocks have posted an average annual performance of 21.1% which compares favorably to the S&P 500’s annual performance of 8%.
In terms of component grades, it’s not surprising that ATKR has a B for Growth and Value given its double-digit earnings and revenue growth in addition to a low P/E. It also has an A for Quality due to its strong balance sheet and capable management team. Click here to see ATKR’s complete POWR Ratings.
What To Do Next?
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ATKR shares . Year-to-date, ATKR has declined -12.79%, versus a -10.02% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...
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