Patrick Industries (PATK): The Best Performing Stock Since 2009

Ian Cassel Blog, Intelligent Fanatics 10 Comments

On February 1, 2009, Todd M. Cleveland became the CEO of a $5 million market cap microcap called Patrick Industries (PATK). In just seven years, he would transform the company through acquisitions and organic growth into a $61 per share, $940 million market cap, compounding machine. Since Todd Cleveland’s appointment to CEO, Patrick Industries has outperformed every other stock in North America. Shares have risen 16,000%, an astounding 106% CAGR.

PATK Chart

PATK Stock PerformanceWhat does Patrick Industries do? Certainly it must be an exciting cutting edge technology or infrastructure company. No, quite the contrary. Similar to our intelligent fanatic 100-Bagger case study of Selim Bassoul of Middleby Corp (MIDD) that manufactured commercial kitchen equipment, Patrick Industries also operates in an unglamorous industry.

Patrick Industries manufactures and supplies building products to the Recreational Vehicle (RV), Manufactured Home (MH), and Industrial markets. The majority of their business is manufacturing pre-finished wall and ceiling panels, cabinet doors, cabinet components, fiber reinforced products, cement siding, interior passage doors, furniture, roofing products, lighting, flooring, electrical, wiring, plumbing, and other products to these markets. In other words, most of the stuff that goes inside an RV or manufactured home, Patrick Industries manufactures.

As mentioned in The Conviction To Hold, we all would like to think we would have had the conviction and foresight to invest in a company like Patrick Industries in 2009. A picture is worth a thousand words, and it would have taken a very special person to want to dive into the RV and MH industry during the crisis of 2008-2009:

MH Shipments

RV ShipmentsPatrick Industries was founded in 1959 by Mervin D. Lung. The Company’s operations began as a distributor of paneling to the Elkhart, Indiana area’s manufactured housing industry. The company went public in 1968 and expanded by opening facilities in Kansas, Pennsylvania, Texas, North Carolina, and Florida. David Lung, Mervin’s son, becomes President in 1989, and would later become CEO in 2000. Some would say Mervin left at the top. As the chart showcased above, 1998 would prove to be a multi-year high point for the MH industry.

The manufactured housing industry shipped 170,700 units in 1991 and showed tremendous growth throughout the 1990’s peaking in 1998 with 372,800 units shipped. The 348,700 units shipped in 1999 was still more than double the 1991 shipments; however in 2000, this industry, which represented 55% of Patrick Industries sales, had a nearly 29% decline to 250,600 units. The Recreational Vehicle industry shipments in 2000 were down 6.6% from a 1999 record high, but the fourth quarter showed a decline of 21%.

PATK 1998-2009David Lung would resign in 2003, and Paul Hassler would become CEO in 2004. Hassler would put a three –year strategic plan in place to improve operational performance, while also looking at strategic acquisitions to diversify and expand the company. The company’s operating performance improved over these years.

In April 2007, Patrick Industries acquired Adorn Holdings (the acquisition was the largest in the company’s history), a major manufacturer and supplier to RV, MH, and Industrial markets. Todd Cleveland was the CEO of Adorn Holdings, and would become President and COO of Patrick Industries. Adorn was almost the same size as Patrick Industries, so both companies spent the rest of the year integrating.

“We spent the majority of the year intensely focused with a “heads down” approach to ensure that the integration of Adorn into Patrick was completed in a proficient and timely manner and according to an aggressive consolidation schedule. We worked diligently with the Adorn management team immediately following the acquisition to put together a detailed plan and timeline to successfully capitalize on the efficiencies and maximize the synergies that were identified in our due diligence process. We combined our efforts in all functional areas and our team members worked at an exhausting pace to guarantee that we met our identified objectives. Additionally, our senior management teams spent countless hours focused on the cultural integration of the two successful companies and their related management teams in what we consider to be a merger of equals, with both companies bringing its own set of strengths to the new organization.” –  Patrick Industries 2008 Letter to Shareholders

Paul Hassler’s strategic plan was starting to work, but then the financial crisis hit in 2008. Paul Hassler retired, and Todd Cleveland became CEO in February of 2009. Cleveland was thrown into the CEO role in the worst year in the company’s history. Unit shipment levels in the RV industry declined 55% in the first half of 2009, down 30% for FY 2009. The RV shipments track the consumer confidence index which was at an 18-year low. Unit shipments in the MH industry were down 39% for FY 2009. MH shipments were at 50 year lows.

In 2009, Todd Cleveland had to make some bold moves to rightsize the company and pay down debt (2009 10K):

  • Sold Non-Core Business Units: Completed the sale of American Hardwoods and the aluminum extrusion operation
  • Closed/consolidated facilities to improve operating efficiencies in our plants through increased capacity utilization
  • Managed inventory costs by reducing supplier lead times and minimum order requirements, and by increasing inventory turns
  • Further reduced workforce and production capacities to accommodate anticipated customer demand and maintain
  • Managing our delivery costs through the reduction in our fleet size and consolidating our delivery loads.

Cleveland also focused on boosting morale and company culture: “We have intensified our focus on our “Customer First – Performance Based” culture which is anchored in exceeding our customers’ expectations and proactively adapting to their changing needs, and on developing and growing our talent and capabilities to meet those needs.”

The following year in 2010, Todd Cleveland continued to focus on cash flow and debt reduction. He sold two more non-core facilities and reduced debt by $69 million. He also instituted a branding campaign to highlight the entrepreneurial spirit within the company’s decentralized business units to drive accountability and an ownership mentality within Patrick. The company also entered a new $50 million credit facility with Wells Fargo which supported the long-term working capital needs of the company as well as strategic acquisitions.

Cleveland’s plan was to aggressively expand its RV market share through launching or acquiring quality product lines and line extensions, and the industry was primed for consolidation. He looked to acquire companies with solid management teams and strong customer and supplier relationships that had quality product lines primed for growth. In a very Berkshire Hathaway type of way, Patrick would give the acquired business and management team autonomy and allow their creative entrepreneurial spirit to continue to thrive while back stopping their capital, administrative and operational support needs. Patrick could then increase cross selling opportunities in its extensive product catalog, while increasing revenue per customer.

Patrick Acquisition Summary

In 2010, the company made its first acquisition since Adorn in 2007 and would go on to make 25 more acquisitions over the next six years mainly in the RV industry.What is even more impressive is the lack of equity dilution which is the achilles heal of most microcaps that utilize M&A. As Patrick’s operational performance increased, so did Wells Fargo’s trust in Cleveland’s strategy. The Wells Fargo credit facility was increased to $80 million in 10/2012, $125 million in 6/2014, $165 million in 11/2014, $185 million in 2/2015, $250 million in 4/2015, and finally to $300 million in 8/2015.

Todd Cleveland has proven to be very good capital allocator. Since 2010, his “Capital Allocation Strategy” invested $348 million in acquisitions, capital spending, and buy backs, while debt has only increased $168 million. A good portion of the capital allocation strategy is funded by strong operating cash flows due to low capex maintenance. The company expects to continue to utilize their leverage for strategic acquisitions.

In February 2013, the board approved a $10 million share repurchase program, purchasing ~$6 million during 2013. The share repurchase would be expanded by $10 million in February of 2014, again in 2015, and increased to $50 million in January 2016.  Since February of 2013, the company has repurchased 1.8 million shares (~11% of the company) at a cost of $46 million ($25.04 average cost per share). The share price of Patrick Industries today is $61 per share.

PATK 2009-2016

Todd Cleveland is an intelligent fanatic and has done a tremendous job since becoming the CEO in 2009. He successfully rightsized the company during the great recession of 2008-09, and then skillfully executed his capital allocation strategy to grow the company. Patrick Industries has made 26 acquisitions since 2010 focusing mainly on the RV industry. Critics will say the company has succeeded because of several years of increased consumer confidence and low interest rates. This is true, but RV shipments still haven’t rebounded to 2006 levels when the company was a third its current size. The company will certainly be tested yet again when the US economy inevitably weakens, but you could say this about many intelligent fanatics that slowly built up compounding machines in cyclical industries. Sean Iddings and I showcase a few of them in our upcoming book: The Intelligent Fanatics Project.

All Great Companies Started As Small Companies. Perhaps the most exciting thing about Patrick Industries is it is still a relatively small company (< $1 billion market cap), and Todd Cleveland is still a relatively young intelligent fanatic (48 years old). It will be fun to watch this duo perform for years to come. Interesting to also note: While researching Patrick Industries and Todd Cleveland I quickly realized there was very little outside of public filings. No industry articles. No CEO interviews. I couldn’t even find a picture of Todd Cleveland, which makes him and the company even more alluring.

If you enjoyed reading this article, you will like these:

How To Find Intelligent Fanatic CEOs Early

MTY Food Group – A Case Study of a 100-Bagger

Middleby Corporation (MIDD): Case Study of an Intelligent Fanatic Led 100-Bagger

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Comments 10

  1. Was there any clue that Todd Cleveland was an intelligent fanatic at Adorn?

    If not, then perhaps his early restructuring actions at Patrick may have not looked that different to many other ‘troubleshooter’ CEOs parachuted in at the bottom of the banking crash.

    Indeed, spotting his talent in 2009, 2010 and perhaps 2011 may have been difficult, as many other companies recovered well from being on the brink during that time.

    Ultimately for us ordinary investors reading this site, we want to know if there was a point when it was clear Todd Cleveland was an intelligent fanatic… and yet the shares still looked cheap on what was known at the time… and we could have actually bought without hindsight.

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      In Todd Cleveland’s case it would have been difficult. Very little can be found on him. In Patrick Industries case, you would have had to been aware of the company. Perhaps the triggering event was Tontine (see Terence Channon’s comment below). You could have flown to the annual shareholders meeting and met Cleveland in person. Who knows what sort of qualitative nuggets you would have picked up. Middleby and Patrick Industries do have a few things in common. One of these things is even though they were small microcaps, both companies had rather large revenue bases. In Patrick’s case, a $300 million revenue company has a 1-2-3-4% margin expansion and/or cost reduction with only 10m shares outstanding it is going to make for some big “per share” advances.

      It isn’t easy to find these companies early. It’s even harder to put in the work (meeting management) to build the conviction to make an investment. Harder yet is to go against the grain of the market and other investors. You got to just put in the work. Work that most others aren’t willing and able to do.

      http://www.valueinvestingworld.com/2016/07/phil-fisher-quote.html

  2. Huge kudos to Mr. Cleveland. I actually bought shares between $1-$2 several years ago and sold between $7-$10 when the company’s market cap exceeded its prior high market cap before the transformation. I made out well, but could have made out a lot better.

    A big missing piece of this post is the cash infusion received from Tontine Partners, a hedge fund that took majority ownership of the company. Tontine’s cash kept the company afloat and was the backstop that allowed the company to get the support of Wells Fargo to not only extend the credit facility but to use it for acquisitions. Lenders will often have caveats and restrictions on use of cash when it comes to paying dividends or making share repurchases. When a company is on the cusp of bankruptcy, and PATK was, special permission must be given to shell out dollars for acquisitions (especially since the companies being acquired were also in a state of weakness).

    Big signs for me to purchase were Cleveland’s open market purchases (I think he bought some shares at less than $0.50), Tontine investment and Wells Fargo granting permission to pursue the acquisitions – my guess is maybe an implicit agreement that Tontine would have infused more cash into the company if the deals went sour and Wells said ‘go for it’.

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  3. Thanks for this write up . This company popped up on my screens maybe couple years ago – can’t remember precisely — but I passed on it because I thought it was too expensive at the time AND since it was not in my circle of competence I was not aware of any moat, so I didn’t delve further. Shoulda woulda coulda.

  4. Love this company, and worked for them. Everyone missed a chance of a lifetime to buy this stock during early 09. Executive management is about the best purchasers of companies anywhere, worldwide. They buy really great companies at book value or only small PE multiples.

    Right now, you have to wait for either another turndown in the rv market before you can feel comfortable buying Patrick, or look for boats and/or manufactured housing to improve first. They would love to buy lots more boating and MH component companies, which they are light on right now, and those segments have not yet bounced back from the downturn.

    The executive team is wonderful. Sell if it changes, but buy any substantial dips if they are still in place. I will be.

  5. Ian,

    Very nicely written.

    I think the one big factor here was that they were able to do all of this without significantly increasing the number of shares outstanding.

    What we have learned over the past 15 years of investing, is that the less shares you have outstanding, the more likely it is that you will make money on that investment.

    These guys had good execution, great timing, and two big players that were giving them the capital needed to build the business up.

    CL

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  6. Ian,

    Have you looked into Integrated Electrical Services (IESC)?

    Jeffery Gendell (Tontine Capital) owns a big position in IESC, like he did in PATK, and seems to be deploying similar strategies.

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