{"id":50633,"date":"2023-08-19T23:29:54","date_gmt":"2023-08-20T03:29:54","guid":{"rendered":"https:\/\/ifintechworld.com\/news\/turning-bullish-on-tecnoglass-stock-after-large-correction-nysetgls\/"},"modified":"2023-08-19T23:29:58","modified_gmt":"2023-08-20T03:29:58","slug":"turning-bullish-on-tecnoglass-stock-after-large-correction-nysetgls","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=50633","title":{"rendered":"Turning Bullish On Tecnoglass Stock After Large Correction (NYSE:TGLS)"},"content":{"rendered":"
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It’s amazing how quickly things can change in the financial markets. Just a month ago, I cautioned that shares of Colombian glass and window manufacturer Tecnoglass<\/strong> (NYSE:TGLS<\/span>) appeared to be fully valued ahead of a potential slowdown in the construction industry. Shares have since gotten walloped, with the stock dropping a quick 35%. Indeed, the company has now given up almost all of its 2023 year-to-date gains:<\/span><\/p>\n

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Data by YCharts<\/figcaption><\/figure>\n<\/p>\n

While I think the market was too optimistic when the stock was in the $50s, this may be turning into an overreaction in the other direction. Here’s why I’m moving back to a buy rating for Tecnoglass stock.<\/p>\n

Q2 Earnings Were Strong<\/h2>\n

On August 8th, Tecnoglass reported its Q2 earnings. These came in better than expected. Non-GAAP EPS of $1.12 beat by 5 cents. Revenues of $225 million were way ahead of the expectation for $209 million of revenues; the $225 million figure also represented 33% year-over-year growth.<\/span><\/p>\n

That said, we should take these results with a grain of salt. There was never all that much doubt that Tecnoglass would have strong results in 2023, as there is already a large backlog of orders in place. The question is more around where 2024 and 2025 results will end up as higher interest rates and a potentially flagging South Florida economy start to hit new construction demand.<\/p>\n

Regardless, the Q2 numbers were well ahead of expectations and showed that the business still has strong momentum behind it. So, why did the stock sell off double digits on the seemingly favorable earnings results?<\/p>\n

I believe the answer has to do with gross margins. Here is Tecnoglass’ gross margin evolution since being a publicly-traded company (note that this is annual not quarterly figures):<\/p>\n

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Data by YCharts<\/figcaption><\/figure>\n<\/p>\n

As you can see, the firm has enjoyed a tremendous surge in margins since 2020, with a nearly 2,000 basis point improvement in results. This is the fundamental reason why Tecnoglass went from being a single-digit to $50 stock. It’s great selling more products — people always like top-line growth — but where you really get the exponential earnings growth comes from selling more products at higher margins.<\/p>\n

However, I don’t believe this gross profit margin expansion will be a permanent feature. Tecnoglass does have some proprietary technology and patents which insulate it from commodity pricing effects. Still, for many customers, buying decisions will be made primarily on price. A huge move up in margins potentially opens the door for more production at rival firms to try to steal back some of that margin.<\/p>\n

In addition, the roaring hot housing market of the past few years and shortages of inputs, including windows, gave firms like Tecnoglass a great deal of pricing power. I suspect in a more normal economy, let alone a recession, gross margins settle back toward 40% instead of the recent 50%+ figures Tecnoglass was producing.<\/p>\n

To that point, we saw the first signs of this in the Q2 earnings release. Tecnoglass’ gross margin was 48.7% This was up from 43.5% in the same quarter of 2022. Note, however, that it was down sharply from Q1 of 2023, where Tecnoglass earned a record high profit margin of 53.2%.<\/p>\n

Here is quarterly gross margin data for Tecnoglass:<\/p>\n