Commentary

Valuation: NCI Building Systems Inc. (NCS)

Company Profile: NCI Building Systems Inc. (NCS) (obtained via Yahoo Finance)

NCI Building Systems, Inc. manufactures and markets metal products for the nonresidential construction industry in North America. The company’s Metal Coil Coating segment consists of cleaning, treating, and painting various flat rolled metal coil substrates, as well as slitting and/or embossing the painted coils, before the steel is fabricated for use by various industrial users. It also cleans, treats, and coats hot roll metal coils and light gauge metal for third parties for applications, such as construction products, heating and air conditioning systems, water heaters, lighting fixtures, ceiling grids, office furniture, and other products; and provides toll coating services and package coating. This segment serves other manufacturers of engineered building systems and metal components. Its Metal Components segment designs, manufactures, sells, and distributes metal components for construction applications, as well as for repair and retrofit uses. Its metal components include metal roof and wall systems, metal partitions, metal trim, doors, and other related accessories. This segment also manufactures roll-up and sectional overhead doors and sells interior and exterior walk doors for use in the self storage industry and metal and other buildings. It sells metal components directly to regional manufacturers, contractors, subcontractors, distributors, lumberyards, cooperative buying groups, and other customers. The company’s Engineered Building Systems segment designs, engineers, manufactures, and markets engineered building systems and self-storage building systems for commercial, industrial, agricultural, governmental, and community markets. This segment sells its products to builders, general contractors, developers, private labels, and end users through an in-house sales force. NCI Building Systems, Inc. was founded in 1984 and is headquartered in Houston, Texas.

1) Is the business simple and understandable?

NCI Building Systems designs, manufactures, and markets metal building systems and components. Products include metal roofing and siding systems that are used for commercial, industrial, agricultural, residential, and community-service applications. The company markets its systems and components under 16 different brand names. NCI operates 34 manufacturing plants in the United States and Mexico. This is a business that is simple, understandable and expects to grow as NCI Building Systems is the largest producer and distributor of metal building components for building construction – growing at an estimated 10% annual rate.

2) Does the business have a consistent operating history?

This company has a solid operating history, as its operating income has grown steadily for the past 5 years. In addition they have been able to maintain their operating cash flows up in the triple digits from 2005 on to now. Its 10-year operating income and EPS growth are 12% and 6.4% respectively, which shows strong historical fundamentals values. In addition, NCI has had a positive operating margin for the past 10 years, which shows great management efficiency on the way expenses are run.

3) Does the business have favorable long term prospects?

If we look at the company’s ROE, which has positively grown for the last 5 years, and their P/E (10.4) lower than the industry average (15.1), will make us think that NCI Building will sustain long term positive growth. This company has debt/equity ratio of .84 and current ratio of 1.70, which shows us the great financial health that this company is growing thru.

4) Is management rational?

The company management has been rational as they have maintained growth its own growth without jeopardizing their financial health.

5) Is management candid with its shareholders?

We do not find any trace that shows that the management has not been candid to their shareholders as its investor relation website provides all the data necessary to understand the performance of their stock.

Financial and Value Review

Defensive:

1) Size of firm

This company does not have a market cap higher than $2 billion. “Fail”

2) Strong financial condition

This company’s current ratio is lower than 2. “Fail”

3) Earnings stability

NCI Building Systems has maintained positive Net income for the past 10 years. “Pass”

4) Dividend record

NCS has not constantly paid dividends for the prior 10 years. “Fail”

5) Earnings growth

Its EPS has failed to increase one third for the past 10 years. “Fail”

6) Price to earnings analysis

The PE ratio is lower than 20. “Pass”

7) Price to assets analysis

The company’s PB and PB*PE ratio are lower than 2.5 and 50 respectively. “Pass”/”Pass”

Overall

Having passed four of the eight required defensive investor’s tests; we do not believe NCI Building Systems to be a sound investment for the defensive investor.

Enterprising:

1) Strong financial condition

The company’s current ratio is higher than 1.5 but its debt to NCA is higher than 1.1, therefore passing both of these tests. “Pass”/”Fail”

2) Earnings stability

NCI Building Systems has had positive net income for the past 5 years. “Pass”

3) Dividend record

They do not currently pay dividends. “Fail”

4) Earnings growth

The earning growth has been greater than 5 years ago. “Pass”

5) Price

NCI Building Systems’ price is lower than 150% net tangible assets. “Pass”

Overall

Having passed two out of the six enterprising tests, we feel NCI Building Systems does not fall within the acceptable level for Enterprising Investors.

Valuation:

Our valuation model finds a fair value to be around $38.28.

Opinion:

Since the company is currently trading at about $35.73, we feel it is currently undervalued and that it may only be suitable stock for enterprising investors.

The author did not hold a position in NCS at the time of publication. Also, please read our disclaimer and Our Methods.

Andres Romero
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