An improving housing market and appealing company-specific factors are bound to support accelerated EBITDA growth and better place Norcraft Companies (NCFT) to experience healthy growth.
Advantages that it enjoys
The company has a competitive advantage with its exposure to the dealer channel. This channel accounted for about 90% of last year's revenues. Higher margins are normally seen with buyers in this channel and the relationships last long.
Norcraft Companies, based in Eagan, Minnesota, is a leading kitchen and bathroom cabinetry manufacturer which primarily focuses on the dealer channel that offers advantages versus selling direct to builders or through home centers.
Norcraft recorded an estimated revenue of $340 million in 2013, making it the fifth largest U.S. cabinet manufacturer and reflecting its exposure to the dealer channel (it's the third largest player, with 7% of the market), more than 90% of sales are in the semi-custom segment.
For the time being, switching costs are high. This leads to demand for significant investment. Since 2011, Norcraft's retention rate with "large" customers has been about 97%. Further, till June 2013, the company had been working with its top 50 customers for an average of 15 years.
The recovery of the housing sector could help company gain share and grow profitability, given its penetration in this channel and its operational excellence.
The benefits from recent investments should materialize in the future. Norcraft recently converted a Canadian components facility to a full access cabinet line producer under the Urban Effects brand. It extended its capacity utilization to approximately 60% including this plant.
The road forward
NCFT's highly motivated sales force is further penetrating existing accounts and developing new relationships. The greater operating leverage must drive accelerated top-line growth with these significant investments.
A wide range of product offerings allow for flexibility. Although semi-custom cabinets represented about 91% of Norcraft's sales, still company offers a broad range of products differentiated by both design and price point.
The frame category supports four brands. Norcraft supports two brands in the full access category.
Moving ahead, about two-thirds of its business comprises of demand for repair and remodel with the remainder from new construction. The company offers more than 600,000 door and finish combinations for use in kitchens and bathrooms.
Further, the demand for repair and remodel projects is likely to accelerate with an increased stability around home prices, especially larger ones. The deferred repair and remodel projects should unfold, contributing to additional demand for building products as home prices stabilize.
Norcraft succeeded in improving its sales mix toward higher price products in the downturn as well, which contributed to its margin expansion. While the company isn't focusing on the builder and home center channels today but, supporting a broad product range gives it the opportunity to pursue these options if it chooses to do so mentioned.
Investors are generally optimistic about the housing that has bottomed, and unfolding of the early stages of recovery.
Free cash generation of more than $21 million is forecasted in 2014 by analysts who further anticipate more significant levels in the future. The leverage would most probably decline meaningfully over the next several years, bringing Norcraft in line with its peer average.
Conclusion
The shares of product companies have been quite robust while the slowdown in construction has negatively impacted the home-building stocks that reflects the diversified nature of their businesses and the better free cash flow dynamics. In total, Norcraft is well positioned to witness share gains and increase profitability with the recovery of the housing sector.
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