Looking at Apogee’s gross margin of 24%, it has some room to grow. The average gross margin for the US building materials industry stands at 27%, while the operating margin is at around 10%, versus Apogee’s 9.6%.
Therefore, it seems that investors are overlooking some of the fundamental catalysts when it comes to Apogee. The stock is currently trading at 10.40 times forward earnings and has an EV/EBITDA multiple of 8.30, both of which are below industry averages of 25 and 12.80, respectively.
Moreover, there is another potential catalyst that could improve Apogee’s stock price: the involvement of activist investor Glenn Welling and his fund Engaged Capital. Engaged Capital added Apogee to its equity portfolio during the fourth quarter of 2017 and recently it has boosted the position by 1.33 million shares to 1.71 million shares, or 6% of the company’s outstanding stock. The stake was increased on April 12, right after the company’s stock dropped following fourth-quarter earnings. In the 13D filing, Engaged said that it believes that Apogee owns “several market leading businesses that are differentiated in their respective industries and are attractive, high quality assets.” The investor also pointed out that the stock does not reflect Apogee’s improvements in profitability, cost reduction and diversification efforts. On our website, you can get real-time email alerts when a fund makes changes to its holdings via 13D or 13G filings by signing up and adding your favorite funds to your follow list. In addition, we have launched a monthly activist newsletter that covers activist funds and presents the best ways to imitate that fund (see more details).
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Engaged has discussed and plans to continue discussions with the company’s management and board of directors to improve capital allocation, growth initiatives and other issues in order to close the valuation gap. Bloomberg has reported that Engaged aims to convince Apogee to halt its acquisition spree, focus on improving operations and redirect free cash flow to buy back stock, according to people familiar with the matter. In this way, Welling believes that the stock could be worth $75 per share by February 2020 if Apogee follows its recommendations.
Engaged Capital usually targets small- to mid-size companies and is usually trying to engage in constructive discussions with the board and the management, but is not afraid to take the matters to the public and engage in proxy fights. In 2015, the fund called out Rovi Corporation, in which it had been a shareholder since 2013. Frustrated with lack of progress regarding changes in board composition, Engaged launched a proxy fight, secured two seats and managed to oust the board’s chairman. The following year, Rovi Corporation acquired TiVo, a move that was also reportedly pushed by Welling. Last year, Welling won a proxy fight at Rent-A-Center Inc (NASDAQ:RCII), getting three board seats in June. In September, Welling, which has been pushing for the company to sell itself, issued a letter to Rent-A-Center’s Audit Committee, condemning the company’s spending practices and misuse of capital, which includes owning a jet aircraft. Also in September, Engaged Capital reached an agreement with Hain Celestial Group Inc (NASDAQ:HAIN), which includes sweeping changes to the company’s board. It also has been reported that Engaged Capital might be pushing for Hain Celestial’s sale. In February, Hain Celestial Group Inc (NASDAQ:HAIN) said that it is considering the sale of its protein business, which could be the first step before the sale of the company.
So, looking at Engaged Capital’s M.O. it is not excluded that a potential sale of Apogee Enterprises Inc (NASDAQ:APOG) might be on the horizon, since an acquisition premium would better reflect the company’s fair value. In any case, looking at Apogee’s fundamentals, it seems like Welling is on to something and the stock is indeed significantly undervalued.
Disclosure: none
