1 Undervalued Stock with Strong Seasonal Trend

Architectural glass company Tecnoglass (NASDAQ:TGLS) is a business that many investors have likely never heard of. Despite this, there’s a strong bull argument for the stock at the moment.

Is Tecnoglass a Good Investment Long-Term?

One of the main arguments in Tecnoglass’s favor is the stock’s historically strong seasonality. In seven of the last 10 years, the stock has risen by an average of 11 percent over the coming 5-week period.

This is largely a result of the nature of the company’s business. As the summer construction season gets underway, demand for architectural glass tends to rise significantly, and the market anticipates this spike in demand.

Tecnoglass also appears to be considerably undervalued at its current price. At just 11.2 times earnings, the stock trades at a very favorable price point.

This is especially true in light of the fact that the company’s earnings are expected to increase by 9.25 percent over the coming 12 months.

This undervaluation argument is supported by discounted cash flow analysis, which suggests a fair value of about $56.75 per share. Given the current price of $46.50, this could give Tecnoglass an upside of roughly 22 percent.

With the company’s earnings growing steadily, investors may also be interested in Tecnoglass for its dividend growth potential. Today, the stock yields just 0.77 percent. Its payout ratio, however, is under 10 percent, leaving a great deal of room for future growth.

Management has been steadily increasing the quarterly distribution since a large cut in 2020, and higher earnings will likely continue to drive higher dividends going forward.

50% Revenue Growth + 53% Margin

Tecnoglass has enjoyed excellent growth over the past year. Q1’s report detailed revenue of $202.6 million, up more than 50 percent from the previous year. Much of this growth was attributable to the commercial and multifamily real estate category, which increased by nearly 60 percent. The company’s backlog also improved by 19 percent, a favorable sign for future revenues.

The company impressed further by reporting a record gross margin of 53.2 percent in Q1. Combined with its 58.3 percent return on equity and 23 percent net margin, this makes Tecnoglass an attractive option from a profitability perspective. The company reported earnings of $1.09 per share for the quarter, beating the analysts’ consensus estimate of $0.99 by roughly 10 percent.

One question investors will need to answer about Tecnoglass before buying is whether this growth trend is likely to continue. Analysts currently project the company’s 5-year CAGR to be around 22 percent, potentially giving it a great deal of room left to run.

The market for architectural glass is expected to continue growing over the coming years as new construction projects and demand for energy-efficient glass drive higher demand. As a major manufacturer of solar low-energy glass, it should benefit from these trends.

Analysts Estimates Price Target

Analyst price forecasts for Tecnoglass line up fairly closely with its fair value as estimated by discounted cash flow analysis.

The median target price for TGLS over the coming year is $53, a 14 percent jump from its current price.

Wall Street is quite bullish on the stock at the moment, with four of the five covering analysts rating it as a buy.

Will Tecnoglass Go Down?

Although Tecnoglass clearly has a great deal going for it in terms of both business fundamentals and favorable valuation, the stock could still have its pitfalls. Chief among these is the potential for a significant slowdown in new construction projects in the near future.

In March, for example, housing starts fell 17.2 percent relative to the previous year. Non-residential construction is projected to see a similar slowdown late in 2023 and into 2024. A combination of a slowing economy and higher interest rates could cause Tecnoglass to lag, though such effects would likely be temporary.

Tecnoglass also doesn’t have a particularly strong moat, creating the potential for competition risks. Despite handily outperforming its competitors in terms of revenue growth, the company’s current share of its market is just over 4 percent. Larger competitors could make it difficult for Tecnoglass to continue growing rapidly, though steadily higher glass demand may provide additional room for expansion.

A final sleight on Tecnoglass is its low rate of insider ownership. Company insiders hold only 1.4 percent of the stock, potentially indicating a low level of direct investment in the company’s performance. Insider buying and selling have been roughly equal over the last year, though both spiked in Q1.

Is Tecnoglass a Buy?

Tecnoglass is a rapidly growing company in a business that is expected to see higher demand levels for several years to come. With excellent margins, strong potential forward earnings growth and a reasonable price tag, Tecnoglass appears to have a great deal to offer investors.

Despite the company’s near-term risks, Tecnoglass seems to be a business that could be good to hold over the long term. A slowdown in new construction starts could hamper growth, but the company is in a good position to succeed on a longer time horizon. Provided it can continue increasing its revenues and maintain its margins, Tecnoglass could have several more years of steady earnings growth ahead of it.

It’s also worth noting that Tecnoglass is in a solid financial position. While its debt-to-equity ratio of 0.42 is slightly higher than ideal, the company’s current ratio is over 2.0. This indicates that it has more than enough on hand to meet its current obligations.

Tecnoglass has also been responsibly reducing its debt burden as its cash flows have increased. At the end of Q1, the company’s total liquidity was reported to be $300 million.

Overall, Tecnoglass appears to be a decent buy candidate at today’s prices. Investors may see a seasonal upswing over the next month, and the stock still shows signs of being undervalued. Between these two factors and its strong fundamentals, Tecnoglass’s pros appear to outweigh its cons as an investment.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.