Jim and Abigail Zimmerman of Lowell Capital Management presented their investment thesis on LSI Industries, Inc. (US: LYTS) at Wide-Moat Investing Summit 2024.

Thesis summary:

LSI Industries produces and sells non-residential lighting and retail display solutions in the United States, Canada, Mexico, and Latin America. It operates through two segments, Lighting and Display Solutions. The Lighting segment manufactures, markets, and sells non-residential outdoor and indoor lighting fixture and control solutions in the commercial and industrial markets. The Display Solutions segment manufactures, sells, and installs exterior and interior visual image and display elements, including printed and structural graphics, digital signage, menu board systems, display fixtures, refrigerated displays, and custom display elements.

LSI has several characteristics Jim and Abby like, including (1) a highly resilient business model with deep customer relationships, (2) a highly cash-generative business with low capital expenditure needs, (3) a strong focus on higher value-added services with longer-term and “stickier” customer relationships, (4) an attractive valuation trading at 8x adjusted EBITDA and a high single-digit free cash flow yield, (5) a focus on end-markets that are sustainably growing over the long term, (6) a record of strong sales growth — both organic and inorganic, over several years, (7) a disciplined management team focused on driving organic growth via new products and solutions that are highly engineered as well as accretive acquisitions, (8) a “Ft. Knox” balance sheet with net debt at under 1x adjusted EBITDA, (9) a long-term strategy to grow sales and EBITDA, and (10) a high-ROIC business model with limited capital requirements.

Over the past five years, under CEO Jim Clark, who joined LYTS in November 2018, the Company has shifted its business model away from commodity, “off-the-shelf” products and solutions to higher value-added products and relationships with customers with higher margins and longer contract periods. LYTS has focused on highly engineered and designed solutions to deeply integrate into its customers. LYTS also focused on specific margin verticals and industries with strong long-term growth potential. LYTS eliminated lower-margin work and removed revenue contracts and lower-margin profiles.

Jim and Abby believe LYTS can continue its strong growth trend over the last few years in revenues, adjusted EBITDA, and adjusted EPS. LYTS originally projected to achieve revenues of $500 million and adjusted EBITDA of $50 million by FY25 and achieved these results two years early in FY23. CEO Jim Clark and team quickly produced an updated five-year plan that targets revenues of $800 million and adjusted EBITDA of $100 million, for a 12% EBITDA margin, by FY28. Jim and Abby believe LYTS can achieve the FY28 targets and its highly cash-generative business mode can trade for 10x adjusted EBITDA with zero net debt for a market cap of about $1 billion. Based on 30 million diluted shares outstanding, this would result in a price of about $33 per share versus the recent price of about $15 per share. Further, LYTS’ strategic and diversified manufacturing platform and long-term customer relationships could be attractive to either a strategic or financial purchaser.

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About the instructor:

Jim Zimmerman is founder and portfolio manager of Lowell Capital Value Partners, LP, successor fund to Lowell Capital Fund, L.P. Jim managed Lowell Capital Fund L.P. from 2003 to 2015 employing a proprietary strategy laser-focused on smaller and/or misunderstood companies with large, sustainable free cash flow yields and “Ft. Knox” balance sheets. He generated a compound annual return significantly exceeding the HFRI Equity Hedge Index and the S&P 500 Total Return Index over this period, despite holding a significant net cash position (~30%) for most of this period and Lowell Capital Value Partners has achieved similar results with the same strategy since its founding in 2017. Jim has over 25 years of investment banking and investment management experience in a variety of industries and has been involved with several billion dollars of investments. Jim graduated with a BA with high honors in economics from Princeton University in 1980 and an MBA from Stanford Business School in 1984. He worked at Drexel Burnham Lambert, Inc., 1984 to 1990, serving in the Corporate Finance Department and multiple other investment banks from 1990 to 2003.

Abigail Zimmerman works alongside her father at Lowell Capital. Abigail earned her B.A. in Business Administration at Loyola Marymount University in Los Angeles and has worked with Jim for the last several years. She assists in the generation of new ideas, marketing to current and new investors, research of small and medium cap companies, and detailed due diligence on current and potential investments.

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