Carlisle Companies (CSL): A Good Company, But A Management Shakeup Makes It A Sell

• Since 2021, Carlisle Companies’ (NYSE:CSL) quarterly revenues are routinely above estimates.
• Despite pandemic era market conditions, CSL managed to eliminate $500 million in debt last year.
• Shares Outstanding, Dividend Data, and Debt Levels indicate a BUY for investors.
• EV/Sales multiple indicates better value may exist in this sector but is favorable compared to major competitors.
• CSL has shown year-over-year revenue growth of 3% dating back to 2015.

CSL is a supplier of building envelope products and solutions for energy efficient buildings. The Company operates through two segments: Construction Materials and Weatherproofing Technologies. The CCM segment is a diversified manufacturer and supplier of roofing products and related technologies primarily for the commercial construction market. The segment operates manufacturing facilities and distribution locations throughout the United States and Canada, its primary markets.

Revenue

Carlisle Companies, Inc. has shown steady and incremental revenue growth throughout the history of the company. While there is concern that revenues have dipped in early 2021, company history shows that this is likely an outlier. Company revenues topped $1 billion in a quarter for the first time in 2018 and have remained steadily over $1 billion per quarter since the middle of 2021. Looking at the chart we have a very nice growth curve overall, going all the way back into the mid-90s. This should leave investors confident that CSL can continue to deliver.

Most of CSL’s revenue and growth comes from their construction materials segment. Refer to the following chart showing quarterly revenues for the last 20 years, as it’s quite impressive:

We can also see the operating margins for this segment are quite wide, and have grown significantly over time.

Now let’s compare the bottom-line income/loss from their segments, because it indicates some problems with their Weatherproofing segment. Construction Materials bottom line:

Now here’s the Weatherproofing bottom line for the last 4 quarters (all that’s available on Sentieo):

The latest operating margins for the Weatherproofing segment are in the single digits. This tells me the Weatherproofing segment isn’t doing anywhere near as good as the Construction Materials are. If you’re interested in this company, you should pay close attention to the Weatherproofing segment in the future to ensure it doesn’t start to become a net loss.

Now the bad news here. The president who ran the Construction Materials segment, Nicholas J. Shears, has retired from the company effective last September and his consulting with the company ends in May 2023. The Construction Materials segment, as you’ve seen, is the major driver of income in the company and Mr. Shears was a 38-year veteran of CSL. The newcomer has yet to prove himself in his new role, so this is somewhat concerning for investors.

Valuation

Carlisle Companies, Inc. sits right in the middle range when comparing EV/Sales multiple to its’ closest peers as CSL is at 2.08x. The company also shows its Price/Sales, Price/Earnings, Price/Book, and Price/Cashflow as all middle of the road. There may be better value among peers in its sector, companies like OC or BLDR for instance. However, CSL does boast that very nice revenue curve so perhaps the middle of the pack valuation is justified.

Debt

Carlisle Companies, Inc. reported total company debt of just over $2.5 billion. Leadership at CSL has shown a commitment to keeping debt levels down as total debt spiked almost $1 billion at the beginning of 2022 to around $2.9 billion, but the company managed to eliminate $500 million in total debt over the course of the year.

Overall, it has been raising debt as it expands and purchases new property, plants, and equipment and it closed an acquisition in 2021. Following is a chart of the balance sheet for CSL showing its PP&E:

So the question becomes “is it a good return on the debt?” and “is it serviceable?”

A simple ROE graph shows us that indeed shareholders are getting a decent return on equity. And a simple interest coverage calculation shows us that CSL is currently at a 13.4x interest coverage – meaning the debt should be perfectly serviceable. In light of this, I think the debt is well in hand, and utilized effectively.

Shares Outstanding

Since 2017 CSL has seemed to make a concerted effort to buy back stock. This is something I love to see because it returns value to the shareholders. It’s the sign of a company that’s committed to their shareholders, and also has confidence in its continued ability to grow and expand. It’s a big green flag for me.

Dividend

CSL has consistently risen its dividends over the company’s history in a nice stair-stepper pattern that I love to see. It always makes me happy to see this, especially when combined with share buybacks and an upward revenue curve. It’s yet another sign of a consistent company that returns value. Unfortunately, due to the high price of the stock, the yield is a little low at only 1.3% currently, making it a somewhat unattractive purchase simply for the purpose of dividend payments.

The payout ratio, however, is very sustainable coming in at a current 14.5%, and historically only going as high as 40% in the last decade. I preferably just want the payout ratio below 60%, so this is an all-clear in my book.

Leadership

Carlisle Companies, Inc. is led by the Chairman of the Board and President and Chief Executive officer D. Christian Koch. Koch is one of 8 company officers. The board of directors is made up of 9 men and women from varying backgrounds.

According to Glassdoor, looking at their extremely important Construction Materials segment, it seems things have gone downhill since Nick Shears left. You can see a clear trend down in employee reviews after his retirement and unfortunately a great many of them cite management. Nick Shears was clearly liked by his employees, but his departure has left many of them uncertain as to the future and with a bad taste in their mouths for management.

And this is where I find the major problem with the company, and the issue that prevents me from giving a buy rating. The Construction Materials segment is everything to CSL. With the management shakeup and employees reporting that it’s going downhill, there’s clearly issues here that need to be ironed out.

Technical Analysis

The stock’s price fell rapidly from its highs over $300 following Mr. Shears’ departure. Right now, it’s sitting on an uptrend line set back during COVID, and also just below its 50% fib retracement for the same timeline. Technically speaking it’s at an area of support, but there’s some worry if it will break that uptrend line or not. If it does, then the next support is around $180, then $165.

Conclusion

The positive upward revenue curve from CSL is a huge plus here. It’s exactly what I’d like to see. But it’s all driven by one business segment – Construction Materials. And that segment is currently experiencing a bit of a leadership crisis according to employees in the company. That makes me very hesitant here.

A commitment to buying back shares and maintaining debt along with positive dividend numbers are great indicators that the company is in good financial health. Those are things I love, but it’s still not quite enough for me to overcome the potential issues with leadership. If the leadership wasn’t in question, I’d be much more gung-ho here.

Technically speaking, CSL stock is teetering on a precipice, and a break below the uptrend line can lead to further selling down to the $180 range. I think if you really, really wanted this company then you should look for it sub-$170.

It’s not a bad company at all. In fact, most of its metrics look great. But I think it’s overvalued at this price, given the changes in Construction Materials. Again, if you want it, then set an alert to watch the price fall. I think it still has more to go. Bad employee morale is always something that takes a while to rev up, but when it does the changes in profitability can be crippling. Let this company simmer for a while and see how things unfold.

If you’re already in the stock, I think you should get out or be prepared to feel more pain. Hedging with a put option isn’t a bad idea if you want to hold the stock. If you want it, then wait until it’s at least sub-$180.