Installed Building Products (IBP) sets up as a clean double from $13.00 over the next few years as the housing market returns to more normalized levels. 

The thesis is brief:

• IBP will benefit as housing starts rebound from their present level of 923k to the historic average of 1.4-1.5m
• The insulation installation industry is highly fragmented outside the #1 and 2 players (MAS and IBP), this presents the company with a long acquisition pipeline which they have a history of exploiting in the past
• At roughly 3x mid-cycle EBITDA with a nearly debt free balance sheet the stock is cheap
• No secondary shares were sold in the IPO and Jeff Edwards, the CEO, owns 41% of the company, his incentives are aligned with ours

A bit of history:

• The first IBP branch was opened by the current CEO’s family in Columbus, OH, in the 1970s.  It was run as a small operation until the mid-1990s when the company started to get more aggressive with acquisitions and diversification into other products.  By 2005 they had grown the company to a 5% national market share.  As the housing market was trying to find a bottom in 2010 Littlejohn & Co came in and helped buy out their senior debt in exchange for a mix of common and preferred equity (they will own 17% of the common post-IPO, the proceeds of the offering went towards redeeming the prefs).  IBP IPOed in February of 2014 in what seems to be a typical sequence for a building product company offering these days, the stock priced well below the range ($11 vs the $14-16 range), the deal size was cut, and the stock has been left for dead ever since.

 The Business:

• IBP runs the 2^nd largest insulation installation business in the US with a 16% share of the market (MAS is #1 with roughly 32%).  Their 100+ locations are widely spread throughout the US.
• Roughly 80% of the business goes into the new residential end market.
• 75% of install revenues are insulation, 10% garage doors, 5% rain gutters, 10% other
• They deal with the full spectrum of homebuilders, from PHM/DHI/LEN down to smaller privates
• It’s a pretty simple business.  They handle the process from start to finish.  It begins with direct product sourcing from one of the big three insulation manufactures (OC, Certain Teed, Johns Mansville) and runs through to delivery and installation. 
• We have learned that essentially all builders subcontract insulation installation
• The business earns better margins than most would imagine for two reasons:
  • It cuts one and two-step distributors out of the equation (STCK/BLDR/BXC)
  • It saves the builders money at the site level.  First, their scale always allows them to buy much better than the builders themselves.  Second, insulation installation is an inefficient and expensive use of their skilled labor (think carpenter, etc).  Finally, insulation must pass a building code inspection before the house can be drywalled and since delays are so costly builders have found it isn’t worth the risk of tasking general site laborers with installation.

Share gains/acquisitions:

• As mentioned above, in 2005 IBP had a 5% share of the market, currently they sit at 16%.  In speaking with management they estimate that roughly ½ this gain has come from acquisitions and the other ½ from organic share gain at the local level.
• They made four decent sized acquisitions in 2012 and 2013 for a total of $7.4m which added $41.5m to their 2013 revenues, they won’t break out the math but I believe they pay between 2-3x proforma EBITDA.  50% of the market is still mom and pop operations and I think they can consistently add at least 500bps annually to their topline through acquisitions.
• Organic share theft has occurred as the benefits of scale allow them to buy better and undercut smaller players on price while offering equivalent or better service levels.
• While its tough to get specific historical data on this, their revenue per US completion went from $185 in 2005 to $565 in 2013.  In 2013 alone their organic growth rate was 30% while US completions grew 18%.

Model/Assumptions:

• I get to $1B in normalized revs as US housing completions (these lag starts by 4-6 months) go from 765k at the end of 2013 to 1.4-1.5m normalized, so that gets me to roughly $830m in revs, plus organic share gains and acquisitions to make up the other $170m over the next 3-4 years.  I think the latter part could prove conservative.
• Normalized EBITDA margins should be 13-15%.  You can get there a few ways.  You could take management’s word for it.  You could use historical incremental margins of 20% as a bridge.  Or you could look at was MAS did last cycle (EBIT was 15% in 2003, 13% in 2004, 12% in 2005).  As they gain share you would also imagine the mid cycle margins should improve over previous cycles.

Valuation

• Eventually I believe a conservative multiple on my normalized earnings number would be 12.5x yielding a $28 stock, it’s a cyclical business so it will (probably) never wear the 15x multiple an industrial distributor gets, buts it’s a higher value add than STCK/BLDR so it should trade at a premium to their 10-11x.  We own a bunch of STCK and have been swapping some of our position for IBP, I think STCK last year down at $14 is a good proxy for how this will behave.

Other points:

• Thus far in the cycle insulation manufacturers have been unable to take pricing, as capacity tightens they should be able to do so, this would benefit IBP’s gross margins and isn’t baked into my assumptions
• The model is a fairly asset-lite way to play the housing recovery, their inventory turns every 15-30 days and capex as a % of sales should be around the 1-1.5% mid-cycle
• Most of the sell side analysts I have spoken with really couldn’t care less about this thing.  They agree with the earnings power but the combination of a limited float and lack of information has them taking a passive stance.