Tecnoglass Looks Colourful But Exciting

I love showing this chart and the mighty bull market that has raged in US stocks since the Second World War. It would have been great to have piled into US stocks 80 years ago, as Warren Buffett did, except that you have to be over 80 to have done that, but fortunately, it is never too late because this bull market is not only still running but most likely accelerating.

Since 1942, shortly after Pearl Harbour in 1941, opportunities to buy US shares after a sharp correction have been rare. We have just had one in 1923. Shares like Nvidia have already staged spectacular recoveries well into new high ground, but I suspect it is still early in this new bull market.

New technologies drive bull markets. In the 1920s it was steelmaking (Carnegie), oil refining (Rockefeller), mass production of motor cars (Henry Ford), banking (JP Morgan), telephone communications (Edison), film production (Hollywood) and, no doubt, other things.

How the world conjured a Depression from all these amazing developments is a tale of hidebound thinking. They didn’t understand the role of fiscal policy and modern central banking and tightened when they should have loosened. When a similar disaster threatened in 2008 the world’s central bankers knew that their primary job was to keep the system afloat. Most importantly they needed to avoid the dramatic (one-third) contraction in the quantity of money that sent 1930s America hurtling down the slippery slope that led to mass unemployment and a slump.

‘Helicopter’ Ben Flies To The Rescue In 2008

Led by Federal Reserve chairman, Helicopter Ben (Bernanke) they did it in style and stock markets exploded higher in a resumption of the great postwar bull market. Bernanke said that if necessary he would fly helicopters over America dropping newly printed $100 bills for people to spend.

Now there is a new round of technology excitement to drive share prices higher. The combination of massive computing power with unimaginable amounts of data is creating a brave new world summed up in the expression GenAI. Whatever you call it, it promises to usher in almost unimaginable technological advances.

People even fear that the machines will take over. Most often the worst scare stories don’t happen and if the machines do take over I don’t suppose that regulation will stop that happening so we might as well all relax and accept our destiny. If Keir Starmer and Co. are all that stand between us and The Terminator I am afraid it is game over.

We just have to hope the robots, androids or whatever they are called in the deep future, like watching Sleepless in Seattle, boning up on Romantic fiction and stories about Santa Claus and turn out to be soppy sentimentalists.

Meanwhile, it is a good time for stockpickers.

Tecnoglass Inc. is a leading producer of architectural glass, windows, and associated aluminum products serving the multi-family, single-family and commercial end markets. Tecnoglass is the second largest glass fabricator serving the U.S. and the #1 architectural glass transformation company in Latin America. Located in Barranquilla, Colombia, the Company’s 4.1m square foot, vertically-integrated and state- of-the-art manufacturing complex provides efficient access to over 1,000 global customers, with the U.S. accounting for more than 90pc of revenues.

Website

The latest presentation, dated September 2024, is an impressive document. Note the 17pc annual growth in revenue between 2012 and 2024 and the 25pc growth in EBITDA [earnings before interest, tax, depreciation and amortisation]. These are terrific numbers.

Another impressive graphic shows how growth has accelerated.

The last slide I will show speaks to the size of the market opportunity.

The company’s manufacturing facilities are based in Columbia, in a port town called Barranquilla, where labour costs US$3 an hour and the facilities are state of the art. No wonder they are so successful in the US which accounted for 95pc of their sales but is still massively underpenetrated.

On top of that, they have just entered the vinyl market which doubles their addressable opportunity. They have been paying dividends since 2016 and even have a share repurchase programme.

Given how well they are doing the CEO’s comments in the latest quarterly report are refreshingly measured.

Our multifamily commercial business saw sequential improvement, but was impacted by higher interest and mortgage rates during the second quarter. Despite this trend, we are seeing a substantial amount of new activity, especially on the high-rise market as evidenced by yet another record level of backlog. We anticipate this positive trend to continue through the second half of the year.

Our forward-looking optimism is supported by the significant level of orders we received in June with residential orders up over 60pc year-over-year, contributing to a record backlog of approximately $1bn at quarter end.

As a reminder, our backlog reflects the pipeline of multifamily commercial activity and firm single-family residential orders in our key geographies, providing visibility through 2025 and building into 2026.

Despite some year-over-year headwinds, including unfavorable foreign exchange impact, we were pleased to see a sequential increase in gross margin and adjusted EBITDA margin. The sequential improvement in profitability and the relative stability in exchange rates over the past several quarters support our positive outlook.

Our improved profitability also gives us confidence in our ability to navigate the evolving market landscape and continue to create value for our shareholders.

The solid growth in our shorter cash cycle single-family residential business and careful working capital management resulted in robust cash flow generation of $34.5m. Impressively, this was achieved even with the timing of seasonal tax payments during the quarter.

Our solid cash generation continues to provide us with additional flexibility to return value to our shareholders through our share repurchases and dividends.

Our cash flow has also allowed us to enhance our operational flexibility and balance sheet through another $50m voluntary repayment of our term-loan during the quarter, totaling $30m of debt repayments year-to-date.

Overall, we are pleased with the improvement we see in our business, and we remain encouraged by recovering demand trends in our end markets.

As we look to the remainder of the year, our positive growth outlook is supported by a strong customer relationship, record backlog and innovative product portfolio.

Jose Manuel Daes, CEO, Tecnoglass, Q2 2024, 8 August 2024

A complication is that the company may be for sale.

Finally, as previously announced on June 25, 2024, Tecnoglass’s Board of Directors is conducting a review of strategic alternatives with the assistance of outside financial and legal advisors.

There is no deadline or definitive timetable set for completion of the review process, and there can be no assurance that this process will result in the company pursuing a transaction or any other particular outcome.

Brad Cray, investor relations, Tecnoglass, Q2 2024, 8 August 2024

Share Recommendations (16 September 2024)

Tecnoglass Inc. TGLS

For an alternative take on Tecnoglass, I found a piece by an entity called Hindenberg Research discussing cocaine cartel connections and allegations of accounting irregularities and faked revenue. The growth story since 2012, which looks impressive, involves the transformation of the business from having most of its sales in South America to having almost all of its sales in the US, especially Florida.

The basic strategy of manufacturing in Columbia and selling in Florida and other parts of the US looks like a good one. The company could sell for a good price given the untapped opportunity in the rest of the giant US market.

Alternatively, it could carry on growing and, having moved its HQ from Columbia to Miami, could bring in less colourful management from the US, albeit the existing management seems to be doing an excellent job.

Strategy – Tecnoglass v Hindenberg Research

Hindenburg Research LLC is a U.S. investment research firm with a focus on activist short-selling founded by Nathan Anderson in 2017. These guys tend to throw everything plus the kitchen sink at the targets of their short-selling operations so I would not necessarily take everything they say as gospel.

Tecnoglass has 9,000 employees, a great chart, an interesting story and impressive growth. I think the shares look worth buying. The Hindenberg Research which is blood-curdlingly detailed was published on 9 December 2021 since when the shares have roughly quadrupled.