Carlisle Companies Q1: A future dividend king with huge return potential (CSL)

Introduction

One of my most successful investments in recent years is Carlisle Businesses (NYSE:CSL), a stock I bought at $211 in May of last year. Since then, shares have appreciated 90%.

Including dividends, CSL shares returned 117% during the period last three years, beating the S&P 500 by about 90 points.

Over the past ten years, CSL has returned more than 450%, outperforming the S&P 500 by more than 200 points.

My most recent article about the company was written on December 8, when I chose the title “Carlisle Companies: A Dividend Aristocrat with a Realistic Path to Annual Returns Above 14%.”

The good news is that despite the company’s fantastic returns, I believe it has the opportunity to double again by 2030, driven by significant long-term growth opportunities, a streamlined business with significant profitability growth, a healthy balance sheet and a focus on shareholder distributions.

As the company just released its results, I have plenty of new data to update my very bullish thesis.

So, without further ado, let’s get straight to the point!

Rapid growth, higher margins and mergers and acquisitions

Even if its performance may suggest it, Carlisle is not a sophisticated technological stock. This Dividend Aristocrat, with 47 consecutive annual dividend hikes, is a giant in the building materials industry.

With a market capitalization of approximately $19 billion, the company is one of the largest providers of building envelope products and solutions aimed at making buildings more energy efficient.

As we can see in the overview below, 90% of its sales are made in the United States, where it operates two segments: Carlisle Construction Materials (“CCM”) and Carlisle Weatherproofing Technologies (“CWT”).

78% of its sales are commercial sales.

Just over 60% of its sales come from replacement and renovation projects, an area I’m very bullish on because the average commercial building in the United States was. 53 years old in 2022!

In its sector, the company has a strategy focused on mergers and acquisitions to improve its offering and tap into a total addressable market of $70 billion, where it currently has a market capitalization of less than 7%.

When reporting its results, the company reported revenue of $1.1 billion, up 23% from the year-ago quarter.

This growth can be explained by several factors, including the end of destocking, the return to normal order levels and strong roof repair activity.

CCM segment sales grew significantly by 36%.

The CCM segment’s adjusted EBITDA saw a significant increase of 66%, reaching $227 million, with a margin increase of 510 basis points to 28.9%.

Unfortunately, the Construction Technologies segment’s revenues saw a 1% year-over-year decline due to lower carryover pricing in certain product categories.

The good news is that despite this slight decline, the segment managed to achieve 20% growth in adjusted EBITDA, with an expanded margin of 20.7%. This is an improvement of 370 basis points from the prior year quarter.

This improvement was attributed to operational efficiencies achieved through the company’s operating system, strategic sourcing efforts leading to reduced input costs and synergies achieved through recent acquisitions.

Especially in this environment, I was very surprised to see that CSL turned 1% lower revenue into 20% higher adjusted EBITDA.

Overall, the company is very optimistic about its pricing outlook for the remaining three quarters of this year, supported by successful price increases from competitors.

In total, the company achieved year-over-year adjusted EPS growth of 85%, supported by volumes, pricing, operating costs, input costs and share repurchases, which improve the per share value of a company.

That said, the company is looking for new M&A opportunities.

He recently sold its Interconnected Technologies activity at Amphenol (APH) for proceeds of approximately $2 billion, which is used to finance new transactions and buyouts. The deal also made it a full-fledged supplier of construction products.

About $1 billion of that product was spent on repurchases, while the company also announced the acquisition of MTL, a Wisconsin-based specialty manufacturer.

This business was acquired for less than 9x EBITDA and should allow Carlisle to penetrate its target market.

MTL makes Carlisle one of the industry’s most comprehensive providers of architectural metal products, including color-coordinated “roof to grass” metal building envelope solutions. MTL generated revenues of $132 million for the twelve months ended February 29, 2024. – CSL

Additionally, the company revised its full-year 2024 revenue outlook upwards to approximately 10% growth from the previous year, or double its initial projection (! ).

This upward revision is explained by the strong performance of the first quarter and the anticipated increased demand for roof repair activities for the remainder of the year.

Better yet, the company expects to increase its adjusted EBITDA margins by at least 100 basis points. Its previous forecast was 50 basis points.

Shareholder distributions and optimistic long-term outlook

As part of its success, the company repurchased $150 million worth of stock in the first quarter and paid $42 million in dividends.

Over the past ten years, the company has repurchased a quarter of its outstanding shares, significantly increasing its strong total return.

The dividend has been increased for 47 consecutive years, meaning there are only three consecutive increases left to become the dividend king!

Over the past five years, the dividend CAGR has been 16.0%, with a payout ratio of less than 20%, which is very impressive. The most recent increase was 13.3% on August 3, 2023.

Unfortunately, for income-oriented investors, the current yield is only 0.9%.

The good news is that the dividend yield is only very low due to the excellent share price performance.

Carlisle can reward its shareholders based on its earnings growth thanks to its healthy balance sheet.

In 1Q24, the company maintained a net leverage ratio of 1.4x, remaining within its target range of 1.0-2.0x EBITDA. It also holds $1.6 billion in cash, enough to service more than 90% of the debt owed through 2030 – technically speaking.

In light of everything said so far in this article – including the 2024 forecast – the company is sticking to its 2030 outlook.

By 2030, the company aims to generate at least $40 in adjusted EPS, supported by annual organic revenue growth of 5%, adjusted EBITDA margins north of 25% and secular growth from megatrends in in energy efficiency, labor savings and growth in roof renovation.

This bodes well for its valuation.

Assessment

Even after its rally, CSL remains attractive.

Using the data from the chart below, CSL is currently trading at a blended P/E ratio of 24.0x. While this is higher than its long-term normalized P/E ratio of 17.9x, I believe a higher multiple is warranted.

Over the past ten years, the company has traded at around 20 times earnings, which makes more sense. After all, it is now a specialist building materials company, with a better margin profile.

This year, analysts expect EPS growth of 24%, potentially followed by growth of 12% and 10% in 2025 and 2026, respectively.

Applying a multiple of 20 to these numbers, the company has a fair medium-term price target of around $471, or 18% above the current price.

Longer term, I expect CSL to double.

Its 2030 target of at least $40 EPS implies a price target of $800 (20 x $40), almost exactly 100% above the current price. Including its dividend, investors are well-positioned to benefit from double-digit annual returns on an extended basis.

This is why I will continue to buy CSL in the event of a downturn.

Take away

With a focus on rapid growth, higher margins and strategic mergers and acquisitions, CSL has improved its position in the building materials industry.

Despite its recent successes, the company remains poised for continued expansion, driven by strong financials, a commitment to shareholder distributions and a bullish long-term outlook.

With a history of consistent dividend increases and a promising trajectory to becoming a dividend king, CSL presents an attractive opportunity for investors looking for sustainable growth and attractive long-term returns.

Advantages and disadvantages

Benefits:

• Strong growth potential: CSL has seen impressive growth, with its shares nearly doubling in just one year. The focus on strategic acquisitions and operational efficiency allows it to continue its expansion.
• Consistent dividend growth: As a Dividend Aristocrat, CSL has increased its dividends for 47 consecutive years, providing investors with reliable income and a history of shareholder value.
• Resilient industry position: With a market capitalization of $19 billion, CSL is a dominant player in the building materials industry, meeting the growing demand for energy-efficient solutions in the commercial sector.
• Strong finances: CSL maintains a healthy balance sheet, with a net leverage ratio of 1.4x and $1.6 billion in liquidity.

The inconvenients:

• Low dividend yield: Despite consistent dividend growth, CSL’s current yield of 0.9% may not be attractive to income-oriented investors looking for higher yields.
• Assessment issues: While CSL remains attractive, its blended P/E ratio of 24.0x exceeds its long-term normalized ratio, meaning it needs to demonstrate the ability to improve margins.
• Market Volatility: Like any investment, CSL is subject to market fluctuations and economic uncertainties, which could impact short-term performance.