BXC - BlueLinx Q1 Earnings: Better Than Feared

2023-05-03 09:20:58 ET

Summary

• BlueLinx Holdings Inc.'s gross margins for Q2 could be in line with or even better than last year's Q2. I estimate that BlueLinx's Q2 gross margins could be around 16% to 17%.
• BlueLinx's specialty products is holding up better than expected.
• BlueLinx has signaled its intention to repurchase up to 5% of its market cap in the near term.

Investment Thesis

BlueLinx Holdings Inc. ( BXC ) puts out a more than satisfactory Q1 report . Yes, investors had been fearful that single-family housing starts were down y/y in Q1, which would see BlueLinx's revenues collapse.

I had already communicated this idea to readers as we headed into Q1 earnings.

But what I believe today, is that BlueLinx's gross margin percentage in Q2 2023 could actually be higher than in Q2 2022. Or at least in line with the prior year's Q2.

Simply put, even if the market reaction post-earnings is a stock that's down 1%, I believe there's a lot to be bullish about here.

Brief Background

BlueLinx Holdings Inc. is a distributor of building products in North America. BlueLinx sells lumber and related products to lumberyards, and home improvement centers.

The business has two segments, which break down as follows in Q1 2023:

What we see here is that this quarter saw BlueLinx's specialty products become a significantly larger proportion of the overall business.

More specifically, its structural products, which sell commodity-like wood products were down significantly at 57% y/y.

While BlueLinx's Specialty Products, which sells high margins products, such as engineered wood, siding, millwork, and industrial products fared comparatively better and was down 26% y/y.

So, is there any reason to be optimistic here?

Revenue Growth Rate Declines Could Be Over the Worst

Investors had long ago expected Q1 2023 to be brutal. The fact that it was indeed brutal, thus, didn't surprise anyone.

Looking ahead to Q2 2023, management doesn't provide much in the way of tangible guidance. What management does state is that for the first 4 weeks of Q2 2023:

average daily sales volumes for both specialty and structural products were slightly improved versus the first quarter of 2023 (emphasis added).

BlueLinx doesn't provide hard numbers for its volumes, so it's difficult to gain much sense of how its revenues will unfold in Q2.

What we do know is that Specialty Products which makes up nearly 70% of its total revenues has gross margin in the range of 18% to 19%, while structural product gross margin are in the range of 10% to 11%.

Looking back to Q2 of last year, specialty products had gross margins of 23%, while structural product gross margin was in the range of 5%.

Accordingly, while BlueLinx's biggest segment will see its margins compress by around 400 basis points, its smaller segment, structural products, will actually see a significant expansion.

Looking back to the commentary of Q2 2022, the reason why BlueLinx's structural products was down so significantly was due to a ''decrease in wood-based commodity prices.''

So, even though lumber prices remain compressed right now, it appears that BlueLinx's gross margins in Q2 2023 could actually positively impress investors. Here's why.

In Q2 2022, BlueLinx's gross margins were 16%. While for Q2 2022, the vast majority of its business, around 70% is tied to its Specialty Products. And given that BlueLinx guides for its specialty products to be around 19% (at the high end), this could translate into the blended gross margin of 16% to 17% for Q2 2023.

Again, this compares with 16.3% in last year's Q2.

Balance Sheet Remains in Rock Solid Shape

BlueLinx's balance sheet holds approximately $200 million of net debt. But keep in mind that despite the turmoil in the real estate market, leading to the decline in home starts, the business is still reporting free cash flows.

Furthermore, consider this chart.

Don't pay too much attention to the adjusted EBITDA % line. Instead, observe how BlueLinx's net leverage has been moving lower with time.

The Bottom Line

The takeaway here is that investors could be too dismissive towards BlueLinx Holdings Inc. on the fear that single-housing starts have not been strong in Q1 2023.

However, the market is looking further afield and coming to the belief that the real estate market may already be starting to find some support.

I will not claim that everything is rosy for BlueLinx. But I do believe that paying 2x trailing EBITDA for a business that clearly is generating clean free cash flows is not something to be dismissive over.

I believe that in 2023, BlueLinx Holdings Inc. could still report around $7 to $8 in EPS, leaving the stock at significantly less than 10x through forward earnings.

BlueLinx Holdings Inc. management also believes the stock is undervalued and has declared its interest in repurchasing around $30 million worth of stock.

For further details see: