How Carlisle Has Captured Big Profits in a Growth Industry

Building projects are arduous, expensive affairs, and the last thing that any contractor wants is to finish a building only to have it fail soon after completion. Having the right kind of protection against the elements is crucial whether you're talking about a new home or a commercial building complex. Carlisle Companies (NYSE: CSL) makes the waterproofing, roofing, and insulation products that builders need to ensure not just that a project gets done on time and on budget but also stands the test of time for its occupants.

Carlisle has done a good job of distinguishing itself from its peers with high-quality products that get the job done. The stock has also performed well over the company's long history, and that's part of what drew my attention to Carlisle as a candidate for the Voyager Portfolio. In this second article of a three-part series on Carlisle, you'll learn more about the secrets of its success and how they've translated into financial strength.

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Navigating a cyclical business

In being a supplier to building projects, Carlisle's business naturally ebbs and flows with the construction industry. From time to time, Carlisle has seen revenue decline year over year, such as during the global financial crisis in 2009 and at the beginning of the COVID-19 pandemic in 2020. However, the company has always been able to recover and reach new all-time records for sales.

Long-term trends, though, show the general growth trajectory of Carlisle's business. Revenue quadrupled between 2010 and 2024. And more importantly, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) have jumped nearly eightfold in the same 14-year stretch, as EBITDA margins have close to doubled. That has left Carlisle as the only building products and light commercial company with annual sales over $2 billion that has achieved both free cash flow margins above 15% and a greater than 25% return on invested capital.

How did Carlisle get where it is today?

To understand Carlisle's success, it's helpful to put its business into the context of the broader industry. Over the course of time, municipalities have updated their building codes to incorporate new needs and the availability of advanced materials. In particular, energy efficiency has been a key focus. In addition, many areas have seen more severe weather events, and that has led regulators to demand materials that are better able to withstand the full force of Mother Nature. In addition, customers seeking to protect their investments have demanded longer periods of warranty protection.

The impact on Carlisle's business has been positive. The thickness of required insulation has grown at roughly 3% per year over the last decade, leading directly to higher sales of Carlisle's insulation products. As weather protection becomes more important, project managers are more willing to pay up for higher-performing weatherproofing membranes and similar products. And over 80% of property warranties now have terms of at least 20 years. With over half of non-residential buildings currently being 35 years old or older, inevitable reroofing projects will require customers to incorporate upgraded materials into their designs, playing to Carlisle's strengths.

Big benefits for Carlisle shareholders

Carlisle has been able to reward shareholders with its financial success. The company is set to achieve a huge milestone this year as it aims to extend a streak of annual dividend increases to 50 years. The company has doubled its payout in just the past four years, raising its dividend yield to a modest but respectable 1.25%.

In addition, Carlisle has returned capital to shareholders through extensive stock buybacks, which over the past three years have amounted to roughly $3.5 billion. That has helped Carlisle reduce its outstanding share count by 28% since 2018, and future buybacks could further boost per-share business metrics and support share-price increases.

The best could be yet to come

Carlisle isn't resting on its laurels. As you'll learn in tomorrow's final installment of this series for the Voyager Portfolio, Carlisle has ambitious growth plans that could fuel long-term gains for investors.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.