Worthington Enterprises (NYSE:WOR) hosts a diversified portfolio of products and a business model that produces profitable joint ventures for the company. Company value in recent years has risen since the separation of Worthington Enterprises' from its steel business. The company's profits and revenues saw a major recovery after COVID-19 in 2022 and 2023. This separation of the businesses and recovery after COVID has directly driven a rise in the stock price of the company.
Not everything has been a success for Worthington Enterprises in recent years. Recently, the company acquired Hexagon Ragasco while also selling its sustainability energy solutions business. These recent business moves should improve profitability, but they also remove the growth potential of the sustainable energy industry. Additionally, recent results in 2024 have shown some top-line reductions, mainly because of competitors and a difficult macroeconomic environment. Even with these headwinds, the company maintains a strong balance sheet and a diversified product portfolio that should set the company up for a resurgence.
When considering these current stories about Worthington Enterprises, we need to determine which news topics will have a long-term and ongoing effect on the company and its share price. Worthington Enterprises’ recent split from its steel business allows for the other product segments to focus strategy away from its cyclical steel process business. This has been a great change for the company, generating great shareholder value in the process.
On the other hand, recent share price drops have been driven by competition, causing pricing pressure and reducing top-line sales. Even with this slight reduction, the company does maintain a strong financial situation and outlook as it continues to acquire and build joint ventures with key strategic partners.
While current news stories, good or bad, can sway our opinion about investing in a company, it's good to analyze the fundamentals of the company and to see where it's been in the past and in which direction it's heading.
This article will focus on the long-term fundamentals of the company, which tend to give us a better picture of the company as a viable investment. I also analyze the value of the company versus the price and help you to determine if Worthington Enterprises is currently trading at a bargain price. I provide various situations which help estimate the company's future returns. In closing, I will tell you my personal opinion about whether I'm interested in taking a position in this company and why.
Snapshot of the Company
A fast way for me to get an overall understanding of the condition of the business is to use the BTMA Stock Analyzer’s company rating score. Worthington Enterprises shows a rating score of 72.34 out of 100. In summary, Worthington Enterprises has mixed indicators with potential headwinds in the future that could impact future prospects.
Before jumping to conclusions, we’ll have to look closer into individual categories to see what’s going on.
Fundamentals
The share price has seen a continued increase after Covid-19. With the recent split of business segments, the value of the stock has risen to reflect the more streamlined core business propositions. The stock price has recently declined in 2024 due to competitive pressures on product prices, reducing top-line sales. Once macroeconomic conditions improve, the company should see an ease to competitive pressure as demand for products returns. Overall, the share price average has grown by about 315.05% over the past 10 years, or a Compound Annual Growth Rate of 17.13%. This is an impressive long-term return.
Earnings
Earnings remained relatively flat until a huge spike in 2021 and a recent declining trend in the following years. This large outlier year is due to the company's sale of its invested stock in Nikola. The following two years saw higher revenue and profit compared to the previous years before Covid-19. The recent declining trend showcases the competitive pressure and macroeconomic environment headwinds that the company faces. Aside from these pressures, the separation of the businesses has incurred some onetime costs that will impact EPS in the short term. Long term, I expect this EPS to remain above previous levels before Covid-19 and begin to increase again once the economy takes a turn.
Since earnings and price per share don’t always give the whole picture, it’s good to look at other factors like the gross margins, return on equity, and return on invested capital.
Return on Equity
The return on equity has fluctuated a lot because of events not directly related to business operations itself. The large outlier years were driven by two distinct events. 2021 was driven by Covid-19 and the impact of the shutdowns on the company. 2022 was driven by the large investment sale of its Nikola shares after the company went public. Taking these two years out, we see a much more consistent return on equity for the company. The recent downturn in ROE is expected to continue into 2024 as the company fights off pricing pressure. For return on equity (ROE), I look for a 5-year average of 16% or more. So, Worthington Enterprises exceeds this requirement.
Let’s compare the ROE of this company to its industry. The average ROE of 44 “Building Materials” companies is 21.35%.
Therefore, Worthington Enterprises’ 5-year average of 26.966% is slightly above its peers.
Return on Invested Capital
The return on invested capital follows a similar trend to the return on equity. The company has maintained a stable capital expenditure, continuing to invest in property, plant, and equipment to produce its product. Since the invested capital has remained consistent, the ROIC is mainly driven by the operating profit of the company. I expect ROIC to remain or slightly decrease from 2023 levels due to recent impacts on top-line sales. For return on invested capital (ROIC), I also look for a 5-year average of 16% or more. So, Worthington Enterprises meets this requirement. But if outlier years of 2021 and 2022 are removed, the more normalized ROIC of 2023 at around 11.5 means that this company needs to improve its ROIC.
Gross Margin Percent
The gross margin percentage (GMP) has remained stable over much of the last 5 years outside of an outlier year where manufacturing costs were lower for steel processing. Industrial manufacturing businesses tend to have smaller margins, but more stable businesses compared to other types of industries. As the company is beginning to be impacted by pricing pressures from competitors, a cost excellence strategy could give it a competitive advantage to begin to take market share through these competitive pressures.
I typically look for companies with gross margin percent consistently above 30%. So, Worthington Enterprises is below this criterion.
Financial Stability
Looking at other fundamentals involving the balance sheet, we can see that the debt-to-equity is less than one. The company shows low long-term debt and the ability to raise more capital if needed.
Worthington Enterprises' Current Ratio of 3.41 indicates that it can pay off short-term debt with its current assets.
Ideally, we’d want to see a Current Ratio of more than 1, so Worthington Enterprises exceeds this amount.
Worthington Enterprises shows a strong balance sheet and all you could want to see for a healthy company. The company continues to engage in joint ventures and acquisitions to bolster its product portfolio and gain market share against its competitors.
Also, Worthington Enterprises pays a regular dividend.
This analysis wouldn’t be complete without considering the value of the company vs. share price.
Value Vs. Price
The company’s Price-Earnings Ratio of 11.42 indicates that Worthington Enterprises is underpriced when comparing Worthington Enterprises Ratio to a long-term market average PE Ratio of 15.
The 10-year and 5-year average PE Ratio of WOR has typically been 14.4 and 11.8, respectively. This indicates that WOR could be currently trading at a low price when comparing to its average historical PE Ratio range.
The Estimated Value of the Stock is $68.32, versus the current stock price of $57.03. This indicates that Worthington Enterprises is currently selling below its value.
For more detailed valuation purposes, I will be using a diluted EPS of 5.19. I’ve used various past averages of growth rates and PE Ratios to calculate different scenarios of valuation ranges from low to average values. The valuations compare growth rates of EPS, Book Value, and Total Equity.
In the table below, you can see the different scenarios, and in the chart, you will see vertical valuation lines that correspond to the table valuation ranges. The dots on the lines represent the current stock price. If the dot is towards the bottom of the valuation range, this would indicate that the stock is undervalued. If the dot is near the top of the valuation line, this would show an overvalued stock.
This analysis shows an average valuation of around $54 per share versus its current price of about $55, this would indicate that Worthington Enterprises is fairly valued.
Looking into more detail, valuations based on past performance show the stock as being slightly overpriced. But valuations based on forward-looking forecasts show the stock is slightly undervalued.
Summarizing the Fundamentals
After analyzing the fundamentals of Worthington Enterprises, I believe this company has a strong fundamental balance sheet with some short-term headwinds that will have an impact on the company. Price per share has risen since Covid-19, while other metrics follow a recent downward trend. EPS, ROIC, and ROE have all fallen as competitive pressures impact the company. Even with the declining trend, the company’s current fundamentals maintain similar levels to those before Covid-19. Gross margin has maintained stability throughout the 5 years, besides the one outlier year where manufacturing costs in steel had improved performance. As pricing pressures impact the company, gross margin will see a decline. Overall, the company is facing some challenges, but the recent split of its two core businesses and a long-term joint venture business model should insulate it some from these current headwinds.
In terms of valuation, my analysis shows that the stock is fairly priced.
Worthington Enterprises Vs. The S&P 500
Now, let’s see how Worthington Enterprises compares versus the US stock market benchmark S&P 500 over the past 10 years. From the chart below, Worthington Enterprises has fallen short of the overall market in returns until recently. However, the recent split of its product and steel processes businesses could allow for more strategic growth that might allow the company to see better returns than the overall market. It will take time for the recently changed company to optimize its processes to achieve this strategic growth.
Forward-Looking Conclusion
Over the next five years, the analysts that follow this company are expecting it to grow earnings at an average annual rate of 41.5%.
In addition, the average one-year price target for this stock is $62.75, which is about a 10% increase in a year.
The Expected Annual Compounding Rate of Return is 8.47%.
Because the company has changed significantly by separating its business segments, it’s hard to determine what the future returns of the company could look like. It will certainly take a few years of consistency until analysts can more confidently estimate growth forecasts.
On the plus side, I feel that Worthington Enterprises’ split from the steel processing business segment was a move in the right direction. It’s a financially sound company that has a good amount of diversity in its existing building products.
Speaking of, here is a visual of the company's diversified products.
Does Worthington Enterprises Pass My Checklist?
- Company Rating 70+ out of 100? Yes (72.33)
- Share Price Compound Annual Growth Rate > 12%? Yes (17.13%)
- Earnings history mostly increasing? No
- ROE (5-year average 16% or greater)? Yes (26.96%)
- ROIC (5-year average 16% or greater)? Yes (17.55%)
- Gross Margin % (5-year average > 30%)? No (14.9%)
- Debt-to-Equity (less than 1)? Yes
- Current Ratio (greater than 1)? Yes
- Outperformed S&P 500 during most of the past 10 years? No
- Do I think this company will continue to successfully sell the same main product/service for the next 10 years? Yes
Worthington Enterprises scored 7/10 or 70%. Therefore, Worthington Enterprises shows decent fundamentals.
Is Worthington Enterprises currently selling at a bargain price?
- Price Earnings less than 16? Yes (11.42)
- Value greater than the Current Stock Price? No, stock is fairly valued. (Value $54 < $55 Stock Price)
Worthington Enterprises has a strong balance sheet and stable product portfolio. Strong revenues and profits since Covid-19 have seen a rise in the company stock price. Recent headwinds and competitive price pressure have begun a declining trend in the fundamentals of the company. Besides these competitive pressures, the company continues to grow through strategic joint ventures, acquisitions, and divestitures. The company has not seen greater returns than the overall market in its past ten-year history, however with the current split between the steel and product businesses, the potential for better strategic objectives could create sustainable value and drive returns for investors over the market.
In conclusion, in the long term, I do think there is value to gain in this company, but with the recent split from its steel business segment, it’s too early to tell how this reshaped company will strategize and perform in the long term. In addition, my valuation analysis tells me that the stock is fairly priced now, so I would want to wait for WOR to head into bargain price territory before considering to invest.
WOR shows promise, but I’ll wait to see some consistently improving performance for multiple quarters, before I consider investing.
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