Patrick (PATK) Up 148% in 3 Months: What's Behind the Rally?

Patrick Industries, Inc.’s PATK shares have been riding high on the back of the industry’s growth, acquisitions and solid geographic-expansion efforts. Also, recovery of the housing market post the pandemic outbreak is encouraging.

Shares of Patrick — a major manufacturer of component products, and distributor of building products and materials for the recreational vehicle (“RV”), manufactured housing and marine industries that displays strength in several key areas — has rallied 148.5% over the past three months, outperforming the industry’s 62.9% upside.

Moreover, earnings estimates have risen over the past few weeks, suggesting that sentiments on Patrick are moving in the right direction. Over the past 30 days, the Zacks Consensus Estimate for 2020 earnings has been revised 10.5% upward. Also, earnings estimates for 2021 have inched up 6.1% in the same time frame. This signifies bullish analysts’ sentiments.

Here are a few factors that are driving this Zacks Rank #2 (Buy) company. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

What’s Going in Patrick’s Favor?

Expansion Strategy: Patrick started the year on a solid note, which was followed by unprecedented and sudden impact from the COVID-19 pandemic. It completed two acquisitions during the first quarter of 2020 and added $20 million in annualized revenues. The company completed the previously announced acquisition of Maple City Woodworking, a Goshen Indiana-based manufacturer of hardwood doors and fascia for the RV market. It also acquired SCI Manufacturing, a Cromwell Indiana-based manufacturer of boat towers, hardtops, ski and tow bars and other metal components for the marine market. These two tuck-in acquisitions are an excellent fit for its existing products and will continue providing long-term strategic value, bringing high-quality innovative product lines to its portfolio.

The company came up with better-than-expected results for first-quarter 2020 despite challenging market conditions. The first-quarter results reflected the positive traction experienced across its end markets in the first two months of 2020, followed by business disruptions due to the COVID-19 pandemic. Diversification of the company’s end markets and geographic regions in which it operates have helped to lessen the impact of COVID-19, as certain plants in various parts of the country remained operational throughout March.

Superior ROE: Patrick’s return on equity (ROE) is indicative of growth potential. Its ROE of 18.6% compares favorably with the industry’s average of 11.8%, implying that it is efficient in using shareholders’ funds.

Recovery of Housing Market: The housing market was on a solid footing before the COVID-19 pandemic outbreak, backed by a favorable economic backdrop. After being hurt by coronavirus-led shutdown since mid-March, the economy has gradually started gaining momentum, as is evident from May’s strong reading. Notably, the trend continued in June as well. The housing market is gradually gaining traction amid low interest rates and pent-up demand for affordable housing. This will definitely lead to higher demand for Patrick’s products.

Although the company expects the uncertainty surrounding unemployment and tightening credit standards to negatively impact demand for both manufactured housing and residential housing in the short term, fundamental housing demand remains strong.

Other Stocks to Consider

Other top-ranked stocks in the construction sector include Otis Worldwide Corporation OTIS, Masco Corporation MAS and Advanced Drainage Systems Inc. WMS. While Otis currently sports a Zacks Rank #1, Masco and Advanced Drainage Systems carry a Zacks Rank #2.

Otis’ earnings estimates for 2020 have increased 1% in the past 30 days.

Masco’s 2021 earnings are expected to increase 14.1%.

Advanced Drainage Systems has a three-five year expected earnings growth rate of 44.5%.

These Stocks Are Poised to Soar Past the Pandemic

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