BXC - BlueLinx Holdings: Rare Combination Of Value And Growth

Summary

• A name we previously traded, dealing in lumber.
• Management team expanding specialty division and making strategic investments.
• Growing revenue and EBITDA.
• A good combination of revenue and growth.

BlueLinx Holdings ( BXC ) is a wholesale distributor of building products for commercial and residential construction. The company and the stock enjoyed secular tailwinds from the pandemic and the impact of low rates and the wave of people investing in their homes. The home building strength was also a benefit. In 2022, the company saw a lot of normalization in pricing and operations as a result of the battle against inflation by the Federal Reserve. The stock normalized for a year straight but has put in a bottom in September 2022. The chart has been strong, and we think the stock has more upside with the growth the company is putting in. We like management's focus on building out the specialty products divisions, and believe that the valuation remains attractive. Let us discuss.

As strange as it may seem, despite rates rising and demand slowing, investments tied to homebuilding, while weak earlier in 2022, have been on a bit of a run, including BXC. This likely comes on the belief that interest rates have peaked. The market is telling us rates have peaked, despite the Fed telegraphing more hikes. We see one last drop in the market as likely, and you should use it to build positions in solid investments. We believe a pullback in BXC is ripe to be purchased. For now we would hold the stock, but any pullback toward $70 is a strong buy level.

Strong Q3 results

In the fall, the company reported Q3 results and we continue to be impressed by the operational excellence on display from the company. We believe that you buy the stock on weakness, because the company, its management, and the stock, are winners. Their Q3 results demonstrate the results of improved execution and leveraging market trends even better this year vs. prior year, despite weakness from the start of rates rising. While there are some lag effects that may impact the next quarter or two, the market is already looking ahead here. This does not mean the stock will go straight up, rather we believe the overall trend will remain higher, though we suspect a pullback is likely with overall earnings season. Our view, largely, is that earnings estimates will be coming down, and take the market down.

Sales growth slowing some with the macro situation, margins strong

That said, the company continues to enjoy growth. BlueLinx's overall net sales were $1.06 billion, up 9.2% year-over-year led by specialty product sales, which increased 13%. We will note that the quarter to quarter trends have flattened some, but the company has improved its margin profile despite pressure.

We saw that gross profit increased 24% to $189 million resulting in a 17.9% overall gross margin. One negative was that SG&A cost increased 20% year-over-year to $92 million. This was due primarily to higher delivery costs as well as workforce investment. There were also costs associated with key growth initiatives for the company.

Specialty products continue to be a key driver of growth. Management has focused heavily on improving sales and margins of its engineered hardwoods, sidings, and lumber panels. As we saw, sales were up here, mostly driven by pricing, as volumes were about flat. Gross profits rose 3%. Now structural products like straight lumber, plywood, and rebar rose as well, but just 2%. Sales were $336 million with gross margin that rose to 11.3% from 1.7% last year. While sales growth was small, this margin expansion was a result of better pricing. In short, the inflation pressures helped margins, as well as solid execution by management on inventories.

So we have sales growing and margins expanding. Folks, it is trickling to the bottom line in a big way. Net income was $60 million, or $6.38 per share, versus $47 million, or $4.74 per share in the prior year period. The company is buying back a ton of shares which were a $0.43 per share benefit as a result of lower shares outstanding. Further, adjusted EBITDA was $100 million, or 9.4% of net sales, as compared to $79 million, or 8.1% of net sales in Q3 2021.

We love the expansion here. The company is also taking steps to growth with strategic acquisitions on top of the buybacks. This is a great place to invest long-term, despite our affinity for trading the stock. While there is some debt, leverage is not an issue here, and free cash flow is positive and expanding. We really think this management team is solid, and that makes us positive even if the market climate is so-so at best. Commenting on the quarter, Dwight Gibson stated:

"...we have invested in high-return opportunities aligned to our growth and value creation strategy while maintaining a strong financial position with significant liquidity. Through the first nine months of 2022, we have invested $19 million in capital expenditures and repurchased 9% of our outstanding shares for $66 million. And on October 3, 2022, we acquired Vandermeer Forest Products including its main branch facilities for $67 million. This strategic acquisition provides a platform for growth in the Pacific Northwest, enables us to serve all 50 states and is well-aligned to our specialty products growth strategy. Even after acquiring Vandermeer, our net leverage remained below 1 times and, as of the end of October, we had over $560 million of available liquidity, including cash on hand and our undrawn revolver."

So the company has bought back 9% of the float. Rest assured they have been buying back more in Q4. This has had a major positive on EPS.

Valuation and growth

The company is expanding, and both valuation and growth are attractive. Even after the stock running higher, Seeking Alpha rates the valuation an A+. The growth metrics are rated a B+. This is a great combination of value and growth. We are talking 0.25X EV/EBITDA, 0.17X price-to-sales, 2.7X price-to-cash flow, and 2.6X FWD EPS. While sales growth is slowing the margin power should be able to offset any short-term declines the next few quarters.

Looking ahead

The company did indicate that through the first month of Q4, volumes are down some, but margin is 20%. This is due to the macro situation (e.g. high rates, slower real estate demand), as well as seasonality. Structural product volumes through the first month were on par with Q3. The recent acquisition of Vandermeer Forest Products allows expansion into the Pacific Northwest. The company now has a footprint in all 5 states. Q4 will be reported next month, and we see EPS declining some from last year, despite buybacks. The decline in sales may be 1-2%, but margins should remain around 20% overall, depending on selling and general expenses. We see EPS coming in around $4.00, which would be a slight decline, but as we move forward, we see things getting better in H2 2023, along with the market, once recession lands and the Fed decides that it's time to talk about rate cuts. We believe on the next selloff here, you should do some buying in this quality company.

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