To The Moon

The stock market’s volatility continued, but the S&P 500 and Nasdaq snapped their losing streak. The best-performing concepts are tesla concept, solid state battery, and SPACs.

Considering the different perceptions of the stock, this time TigerPicks choose $Modine Manufacturing(MOD)$ to have a fundamental highlight to help users understand it better.

$Modine Manufacturing(MOD)$

Modine Manufacturing Company designs and manufactures engineered heat transfer systems and components for use in on- and off-highway original equipment manufacturer (OEM) automotive applications. Over the last year, the company has seen exemplary performance as marked by record financial performance both in Q4 and 2023 FY, with both top and bottom lines growing.

The good financial performance justifies the 200% share growth over the last year. The company attributes its solid financial performance to robust product demand. To a larger extent, they attribute the performance to the internal changes adopted about two years ago. Given this, I am upbeat on the stock, owing to the growing heat pump market in Europe, where the firm is now expanding, as well as rising demands for EVs, which I believe will keep the company’s product demand elevated.

Financial Performance: Record Q4 2023 And FY 2023

MOD had a strong financial performance in both the MRQ and the 2023 fiscal year, both of which were record results.

Financial Growth

Q4 2023 Results Presentation

In the MRQ, Sales of $618 million, up 8% and 11% in constant currency, exceeded forecasts. They reported an adjusted EBITDA of $66 million, up 16% over the previous year. They also earned $24 million in free cash flow and $0.67 in adjusted EPS. This excellent performance culminated in a record year with the highest sales and adjusted EBITDA in their history.

For the full year, sales increased by 12%, while adjusted EBITDA increased by 34% to a record-breaking $212 million. This translates to an EBITDA margin of 9.2%, up 150 basis points from the previous year. In addition, the company generated $57 million in free cash flow and posted adjusted earnings per share of $1.95.

Looking at this outstanding financial performance, I notice the company’s tenacity in the face of adversity. Furthermore, its future upbeat financial projections, in my opinion, demonstrate how optimistic its stock is. Given the company’s growth levers, which will be described in the following sections, I believe those expected outcomes are feasible.

Expansion To Europe: A Response To Growing Demand

MOD is expanding its operations at its existing location in Sremska, Serbia, to fulfill rising demand in Europe’s heat pump sector. The new factory, which will be completed later this year, will be a dedicated maker of coils for commercial and residential heat pump systems.

The European heat pump market is growing at a double-digit rate. Government regulations to reduce fossil fuel usage and greenhouse gas emissions across industries have increased governmental support and incentives to install heat pumps. According to the International Energy Agency, yearly heat pump sales in the European Union will reach 7 million units by 2030, up from 2 million in 2021.

Modine has decades of experience producing high-quality heat transfer coils for HVAC contractors, integrators, distributors, and OEMs. Modine Serbia was founded in 2014 to produce heat transfer coils for commercial refrigeration and HVAC applications. The plant has received new investment over the years and was extended in 2019 to service the rising heat pump market. The new factory will be built next to the present one.

Given the rising market and the government incentive, this is a wise move, in my opinion. In my opinion, this expansion will translate into more revenues, leading to higher margins. In other words, after this expansion is completed, I anticipate greater financial success.

The Rising Market In Europe: Justifying The Expansion To Europe

In 2022, approximately 3 million heat pumps were sold in Europe, representing a nearly 40% increase over the previous year. Russia’s invasion of Ukraine fueled this trend by driving up natural gas and power prices, prompting people to switch to heat pumps, which are substantially more efficient than traditional heating methods. Last year, the European Commission also announced plans to quadruple the deployment pace of heat pumps, as originally envisaged in the IEA’s 10-Point Plan to Reduce the European Union’s Reliance on Russian Natural Gas.

The majority of air-to-air units, which make up between 50% and 80% of installations, are sold in the Nordic and Baltic nations. Similarly, Southern Europe likewise has a high rate of such unit purchases. Air-to-water heat pumps are the preferred technology in Germany and Poland. For instance, hybrid systems, which pair heat pumps with gas boilers, are common in Italy, where they will account for more than 40% of air-to-water market sales in 2022. The most effective kinds are ground- and water-source heat pumps, which are also the priciest. They currently make up less than 10% of European sales due to the requirement for drilling operations and additional space.

In 2022, the first year of a nationwide ban on gas boilers in new buildings, heat pumps in buildings in France outsold fossil fuel boilers for the first time. Despite declining demand in other significant European nations, fossil fuel boilers still hold a larger market share than heat pumps. For instance, in Germany and Italy, heat pumps were outsold by fossil fuel boilers by a factor of two in 2022.

There are plans to phase out polluting technologies and fuels simultaneously. According to German government plans, new heating systems must rely primarily on renewable energy sources starting in 2024. Seventeen European nations have enacted or made plans to enact prohibitions on installing boilers that use only fossil fuels.

Given this context, I believe that MOD’s expansion to Europe is justified and may be profitable. Government policies are encouraging this economic tendency, and the market is expanding due to surging demand. It strikes me as a worthwhile and promising endeavor.

The Valuation

Modine Manufacturing's key valuation metrics are much higher today compared to the 5-year averages. However, compared to the median of the consumer goods sector, MOD lags significantly on almost all valuation metrics - hence MOD's strong "B-" rating, based on Seeking Alpha's Quant system:

Seeking Alpha Premium

The market expects from MOD an average EPS growth of ~21.9% year-over-year over the next 2 years, implying a sharper decline in the P/E multiple [from 13.82x in FY24 to 11.35x in FY25]:

Seeking Alpha Premium, author's notes

Over the last 5 quarters, MOD has consistently beaten EPS forecasts by at least a double-digit percentage, demonstrating once again how the obscurity of this company has a positive impact on the final return on such an investment.

Seeking Alpha Premium, author's notes

What I mean by this is that the market continues to underestimate the company's growth prospects as it expands its margins and improves its operations by growing its revenue and EBITDA in the way we see in Modine's example because its market capitalization does not allow it to get on the radar of large institutional investors. But EPS surprises ultimately help attract new audiences and at least partially correct unfair valuations - which is why MOD's current and forwarding P/Es, EV/EBITDAs, P/Bs, etc. are much higher compared to the firm's long-term multiples.

Let us assess the fairness of MOD's multiples by looking at them through the lens of the firm's direct peers:

1. $Lennox(LII)$

2. $Gentherm(THRM)$

3. $BorgWarner(BWA)$

YCharts [author's notes]

As you can see, MOD's EV/EBITDA forwarding multiple is quite average - this can be explained by the still lagging margins of the company. But this very margin is growing much faster than average - as we can see, the room for growth is still there, which may indicate that MOD should eventually see a multiple expansion. I think an EV/EBITDA ratio of 10-12x in 2-3 years from today is quite fair.

Management has set the following targets for FY2024:

MOD's IR materials [Q4 FY23]

At the low end of my "fair range" EV/EBITDA, Modine Manufacturing should be valued at ~$2.416 billion after adjusting for net debt of $342.8 million. This output offers an upside potential of ~41% from the last closing price.

Stock Price Forecast:

Here are the target price forecasts for the next 12 months from analysts on CNNMoney.com.

The 4 analysts offering 12-month price forecasts for Modine Manufacturing Co have a median target of 51.50, with a high estimate of 57.00 and a low estimate of 45.00. The median estimate represents a +13.86% increase from the last price of 45.23.

Resource:

https://seekingalpha.com/article/4616423-modine-manufacturing-stock-is-still-a-solid-bet-on-ev-future

https://seekingalpha.com/article/4611549-modine-manufacturing-company-the-future-is-promising-and-valuation-is-reasonable

What are your thoughts on $Modine Manufacturing(MOD)$?

Or do you know other companies in the industry?

Please leave your comment below.

🎁Prizes

All Tigers who leave valid comments in the comments section will receive Tiger Coins.