Flexible metal hose manufacturers aren’t precisely the kind of businesses that spring to mind whenever you consider stocks with market-crushing potential. Nonetheless, as a pacesetter in this versatile metal hose area of interest — primarily corrugated stainless-steel tubing (CSST) — Omega Flex (NASDAQ: OFLX) proves that monstrous returns can come from all varieties of stocks.
From the corporate’s initial public offering (IPO) in 2005 through 2021, Omega Flex produced total returns greater than six times higher than those of the S&P 500 index. Even after Omega Flex saw its share price decline 74% in the previous couple of years, mainly as a consequence of the cyclicality of its operations and its industry, the corporate’s returns have roughly equaled those of the S&P 500 index since Omega Flex’s IPO.
As alarming as this sell-off has been, I am unable to help but see it as a once-in-a-decade opportunity for investors with the patience to purchase and hold for a decade at a time. Here’s what makes Omega Flex a horny investment.
Omega Flex moves hand-in-hand with the U.S. housing market
Omega Flex’s CSST systems provide several benefits over traditional black iron piping for fuel gases in residential and business construction. Unlike black iron or copper pipe, which needs threads and separate fittings attached for every bend crucial during construction, Omega Flex’s flexible tubing could be bent by hand and installed in lengthy, uninterrupted lines throughout a constructing.
Along with this simplified installation process, Omega Flex’s CSST performs higher than rigid piping during earthquakes and lightning strikes, making it more proof against damage. Because of these benefits, CSST now accounts for roughly 50% of fuel gas piping in latest and remodeled housing construction within the U.S. — a distinct segment where Omageflex considers itself a pacesetter.
Constantly iterating upon the proprietary rotary manufacturing process it developed in 1995, the corporate’s production capabilities are as flexible because the CSST it sells, providing its goods on an as-demanded basis.
While this leadership position in a growing area of interest is promising, the overwhelming majority of Omega Flex’s sales correlate to the cyclical housing industry in america.
With its sales moving hand-in-hand with U.S. housing starts, Omega Flex has struggled mightily over the past couple of years. As U.S. housing starts continued to slow because the market battled rising rates of interest, the after-effects of high inflation, and an uncertain consumer on the whole, Omega Flex’s sales dropped in tandem.
Nonetheless, research from Zillow shows that the U.S. housing market stays 4.5 million homes short, and consumers are pining for more cost-effective housing. Over the long term, this could rejuvenate growth within the variety of U.S. housing starts, but when this transformation will occur is uncertain.
Ultimately, though, with the Federal Reserve set to chop rates of interest in September, the tide is perhaps beginning to turn for Omega Flex over the shorter term. Best yet, for investors, the corporate can currently be purchased at what looks like a once-in-a-decade valuation.
A once-in-a-decade opportunity
No matter when the turnaround in the expansion of U.S. housing starts occurs, investors buying Omega Flex can take solace within the undeniable fact that they’re getting a top-tier compounder at a superb price. Even with the corporate currently within the trough of its business cycle, Omega Flex currently holds a return on invested capital (ROIC) of 24%.
Measuring the corporate’s profitability in comparison with its debt and equity, this resilient ROIC is indicative of a large moat surrounding Omega Flex’s operations. Historically, firms that generate a better ROIC than their peers have proven to deliver outperforming stock returns, as this text suggests. Along with this high ROIC, the corporate has maintained an 18% net income margin despite the difficult macroeconomic environment.
On the valuation side, Omega Flex’s price-to-earnings (P/E) ratio of 25 is near 10-year lows, and its 2.8% dividend yield is at all-time highs.
Despite these large dividend payments amid the difficult operating environment, the corporate only uses 69% of its net income to fund its payout. Typically distributing the vast majority of its earnings to shareholders over recent years — including a hefty special dividend in 2019 — management is not afraid to return money to shareholders. With insiders owning 25% of the corporate’s shares, management is well incentivized to proceed growing these dividends — possibly even at an accelerated rate once revenue growth returns.
Ultimately, Omega Flex is not the flashiest investment opportunity on the market. Nonetheless, short- and long-term trends are beginning to lean in Omega Flex’s favor. With the corporate’s highly profitable (albeit cyclical) operations available at a once-in-a-decade valuation, I feel it makes for a powerful dividend stock to purchase and hold for a long time.
Must you invest $1,000 in Omega Flex right away?
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Josh Kohn-Lindquist has positions in Omega Flex and Zillow Group. The Motley Idiot has positions in and recommends Zillow Group. The Motley Idiot has a disclosure policy.
A Once-in-a-Decade Opportunity: 1 Magnificent Dividend Stock Down 74% to Buy Now and Hold Without end was originally published by The Motley Idiot