Description

BLD is the leading installer and specialty distributor of insulation and building product materials to the North American construction industry. They leverage their national footprint to gain scale while capitalizing on their local market presence. The company provides insulation solutions and building material installation services through their brand, TruTeam, which has approximately 235 branches across the US and Canada. They distribute building insulation and building product materials for the residential and commercial end-markets through service partners and mechanical insulation and other specialty products for the commercial and industrial end-markets through Distribution International. Their specialty distribution network includes 175 branches.

The installation segment (51% of sales) includes fiberglass batts and rolls, Blown-in loose fill fiberglass, polyurethane spray foam, and blown-in loose fill cellulose. The insulation portion of the segment represents approximately 79% of the segment’s sales, with the remaining balance coming from other products including glass and windows, rain gutters, after-paint products, fireproofing, garage doors and fireplaces. BLD handles every stage of the installation process including material procurement supplied by leading manufacturers, project scheduling and logistics, multi-phase professional installation and quality assurance. Its other business segment is Specialty Distribution (41% of sales) distributes building and mechanical insulation, insulation accessories, rain gutters and other building product materials for the residential and commercial/industrial end-markets. About 89% of specialty distribution sales come from insulation and insulation accessories, primarily fiberglass and spray foam. The demand for these products and services is driven by new single-family residential and multi-family home construction, commercial/industrial construction, residential Remodel and Repair (RnR) activity, and commercial/industrial plants.

While the stock does not directly trade off of data, it is used as a barometer for the building environment. The stock is tied to housing starts (and completions) and building permits as those government data points can be an indicator of demand for BLD’s products in the near future. BLD performance tends to lag that of housing starts by about four and a half to five months due to where it sits in the construction cycle. On the commercial side, it tends to have a longer lag of six to twelve months.

The below chart shows the YoY change in SAAR Housing starts vs BLD total revenue. Over the last three to four years, you can see the relationship that BLD revenue growth tends to lag housing starts by several months. In 1Q22, housing starts inflected positively, with the latest print reaching a six-month high at 1.56M starts for November. I would expect BLD revenue to accelerate again based on these results over the next two quarters and into the medium-term.

With housing starts starting to accelerate, I accordingly have BLD revenue picking back up heading into 2024. I am modeling a material acceleration in FY24 with revenue growing +9% YoY and then +7% growth in FY25 as the business continues to grow and outperform the category. Embedded in these numbers are the assumptions that single-family outpaces multi-family growth with +LSD to +MSD pricing layered in. This would imply Residential sales maintaining a near-historical 5yr sales CAGR of around +11.0-11.5% and Commercial actually decelerating slightly on a 5yr CAGR. Given the volatility in the housing market, I believe consensus is on the conservative side and failing to appreciate the true demand environment currently and over the next 12-18 months. I am modestly above consensus in FY24-26 as the company has both micro and macro tailwinds in its favor.

Over the next two years, I have margins expanding at around an average of 25bps annually as the company continues to gain economies of scale. The installation also carries a higher EBIT margin of 18.5%, compared to the Specialty Distribution segment which has a 14.3% margin. With installation modeled to grow faster than specialty distribution, the margin will gradually increase due to the greater contribution from the segment. Based on the fact that I am above the Street in revenue composition, that leads to a higher than Street margin in each of the out-years.

With above Street topline and margins, I fall modestly ahead of the Street on the bottom-line in FY24-26 as the company continues to execute well in the market and accelerates its growth rate in the midst of an improving housing market. Under these assumptions, the risk reward is $318 x $431 wiht risk to the upside wiht improving macroeconomic fundamentals. 

The company also a strong and disciplined capital allocation. Like many other businesses, they prioritize internal investments, typically with CapEx around 1.5-2.0% of sales. They also have a history of being an acquisitive company, with BLD having completed 28 transactions over the last several years. Through those deals, they have added roughly $1.6B in revenue and have paid 3-4x TTM EBITDA post synergies. Their third priority has been share repurchases, although this has been a relatively smaller bucket due to the amount of deals they have done. Since 2017, they have repurchased about $450M at an average share price of $78.13, with the latest block being in May 2022, when they bought back $100M. Their fourth and final strategy is debt reduction. This works out to about $2.7B in capital with 71% of it being used for acquisitions, 17% for share repurchases, 8% for internal investments and the remaining 4% for debt reduction.

BLD has historically traded between a range between a range of ~7.0x and ~14.0x EBITDA with the long-term average being around 10.3x. Given the structural changes to the company, I think BLD can trade pre-COVID average of ~9.2x and its longer-term average of ~10.3x. Ultimately I think this can trade between 11.0x and 12.0x, which is why I am using 11.5x FY25 EBITDA. While the name is currently trading at 11.6x consensus FY24 EBITDA, I believe that number is conservative. On my numbers, BLD is currently trading at 11.0x FY25 EBITDA.

BLD has historically traded between a range between a range of ~7.0x and ~14.0x EBITDA with the long-term average being around 10.3x. Given the structural changes to the company, I think BLD can trade pre-COVID average of ~9.2x and its longer-term average of ~10.3x. Ultimately I think this can trade between 11.0x and 12.0x, which is why I am using 11.5x FY25 EBITDA. While the name is currently trading at 11.6x consensus FY24 EBITDA, I believe that number is conservative. On my numbers, BLD is currently trading at 11.0x FY25 EBITDA.

Catalyst

• Single family home starts increasing
• Existing Home sales increasing
• Mortgage rates normalizing to MSD or LSD rates