The following segment was excerpted from this fund letter.
Tecnoglass Inc (NYSE:TGLS)
Tecnoglass is a vertically integrated manufacturer, supplier, and installer of architectural glass, framing systems, windows, and doors. The company’s automated manufacturing base in Colombia allows it to manufacture products at a much lower cost than domestic companies. Shipping expenses are a low-single digit percentage of revenues because Tecnoglass transports products to the United States in containers that would otherwise return empty (there is a significant trade imbalance between the US and Colombia).
The company has a reputation for quality. Its entry-level windows are made of tempered glass (compared to more fragile annealed glass of competitors) and its framing systems are coated with a resin-based coating that performs better (resistance to fade/scratches) than the powder coat coating of peers. The company initially took market share by pricing below competitors, but as its reputation for quality and dealer network has grown the company has been able to increase prices and currently prices at or near market rates.
Before 2017, the company strictly supplied glass for commercial buildings. In 2017, the company entered the residential market. During the COVID19 pandemic, the company was able to maintain its output and took market share from domestic competitors who suffered from supply chain kinks and mandated factory shutdowns. Dealers who made the jump from competitors have mostly stuck with Tecnoglass. The rapid increase in market share has led to a >30% sales CAGR for Tecnoglass’s residential business since 2020.
Today, the bulk of the company’s sales are made in Florida. Florida, specifically Miami-Dade County, has the strictest standards for impact resistant windows in the country. This is relevant as manufacturers of impact resistant glass are leading innovations in thermally efficient glass that is increasingly relevant as consumers and developers build and remodel homes today. Thermally efficient windows and doors were made eligible for federal tax credits as part of the Inflation Reduction Act through 2032. We expect the tax credits will provide a tailwind to Tecnoglass as the company enters new markets in Texas and along the East Coast.
As of this write-up, Tecnoglass’s closest peer, PGT Innovations, trades for 8.0x EBITDA and is in talks to be acquired. If we apply a similar multiple to TGLS shares we would get a share price roughly 60% higher than today’s price. You can penalize the company for being controlled by the founders, but we think a premium multiple is warranted given the company’s competitive advantages, its higher margins, healthier balance sheet, track record of taking market share, and its long runway for growth.
In August, the company relocated its headquarters to Miami form Barranquilla, Colombia. This move should open the door for inclusion in index funds and make the stock more attractive to domestic managers.
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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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