Building products are a significant part of the wider economy. Indeed, as the population and therefore the economy grows, the demand for various structures in which people can live, work, play and shop will also continue to grow. One company that plays a very niche role in this space is TopBuild Corp. (NYSE:BLD). In recent years, the company has seen its turnover grow at a steady pace. This also led to improved results. While the company’s stock doesn’t look particularly cheap, it certainly doesn’t look expensive either. And between the organic growth the company is achieving and the growth fueled by acquisitions it has taken in recent months, the outlook for shareholders is definitely encouraging.
A company in full transformation
Today, TopBuild serves as an installer and distributor of insulation and other building products for the construction industry in the United States. It operates in two key segments. One of them, called TruTeam, provides insulation installation services across the country through its contractor services business of approximately 200 installation branches. Its installation applications include fiberglass batts and rolls, blown bulk fiberglass and cellulose, and spray polyurethane foam. In its 2020 fiscal year, this particular segment accounted for 72% of the company’s overall sales. And in this context, 73% of sales came from the sale of insulation products, the rest coming from the installation of other construction products such as glass, windows, gutters, products after painting, doors of garage, fireplaces, etc.
The other segment of the company is called Distribution (Service Partners). In this segment, the company distributes insulation, related accessories and other building products such as gutters, chimneys, closet shelves and roofing materials, through 75 distribution centers across the United States. Its individual clients are insulation contractors, gutter contractors and other related contractors who have their own projects to complete.
Over the past few years, management has been very successful in growing the company’s turnover. Sales increased from $1.74 billion in 2016 to $2.72 billion in 2020. Even between 2019 and 2020, amid the COVID-19 pandemic, sales still increased by 3.6 % year over year. Financial performance for 2021 spans only the first nine months of the year. But the results are also encouraging. Sales during this window totaled $2.42 billion. This is 21.3% more than the approximately $2 billion generated a year earlier.
Management has not been afraid to acquire various properties in order to achieve its objectives. Its most recently announced acquisition was for Insulating Products, which management made public on January 6 of this year. Terms were not disclosed regarding the transaction, but the company said the deal would bring in revenue of around $11 million per year. Previously, in November 2021, the company announced the acquisition of two residential insulation installation companies, one located in Utah and the other in Colorado, generating combined sales of $6 million. As a result of these particular transactions, asset purchases spanning the first 11 months of 2021 generated additional annual revenue for the company of $1 billion. Last year, the largest such purchase took place in October with the acquisition of Distribution International. This deal brought the company into the $5 billion mechanical insulation market and is expected to generate revenue of approximately $747 million per year. According to the company, EBITDA from this particular purchase is expected to be approximately $75 million per year, excluding between $35 million and $40 million of better planned annual synergies. Including the assumed debt, this transaction cost shareholders $1.05 billion.
As revenues have increased, profitability has also increased. Net income has increased in four of the past five years, from $72.6 million in 2016 to $247 million in 2020. Operating cash flow has followed suit, increasing from $76.8 million dollars to $357.9 million. And EBITDA went from $144.4 million to $433.7 million. For the first nine months of 2021, this performance has continued. Profits of $245.7 million eclipsed the $176.3 million earned in 2020. Cash flow from operations fell from $255.7 million to $309.5 million. And EBITDA went from $313 million to $420.1 million.
Regarding guidance for fiscal year 2021, management expected sales to be between $3.425 billion and $3.475 billion. Accordingly, EBITDA was forecast from $585 million to $605 million. Taking the midpoint here, we can estimate operating cash flow for the year at $491 million and net profit at $339 million. Because we don’t have more guidance as to what other acquisitions the company has continued to make, I’d rather not guess what FY2022 might look like. However, we do know that adjusted for deals announced through October last year, this annualized EBITDA, excluding synergies, would be approximately $604 million. And with them, that figure would be around $647 million. But for the purposes of this analysis, I would prefer to err on the side of caution.
Taking all of this data, I find that the stock is trading at a price/earnings multiple of 21.5. The price/operating cash flow multiple is even lower at 14.9, while the EV/EBITDA multiple stands at 12.9. To put all of this into perspective, I decided to compare the company to the top five rated peers, as defined by Seeking Alpha’s Quant platform. On a price-earnings basis, these companies ranged from a low of 4.4 to a high of 12.3. And on an EV/EBITDA basis, the range was 4.9 to 10. Using these two approaches, our outlook was the most expensive of the bunch. Meanwhile, the price to operating cash flow approach gave a range of 10.4 to 29.7. From this point of view, only one of the five companies was more expensive than our prospect.
|Society||Prizes / Earnings||Price / Operating Cash||EV / EBITDA|
|Legacy Housing Corporation (LEGH)||12.3||10.4||10.0|
|Meritage Homes Corporation (MTH)||5.9||25.6||4.9|
|Communities of the Century (CCS)||5.1||20.0||4.9|
|KB Home (KBH)||6.8||29.7||7.0|
|Beazer Homes United States (BZH)||4.4||17.0||8.6|
To take with
I have no doubt right now that TopBuild is an excellent company with a bright future. The company continues to grow organically and through acquisitions. As long as this trend continues, its prospects are excellent. Using 2021 estimates, stocks don’t look particularly cheap, but they don’t look that expensive either. At worst, they would probably be fairly valued. But if you also consider that my analysis is probably more conservative than what recent acquisitions will push the company towards, I would say that could be a good value-oriented outlook for patient long-term investors.