2023-12-15 11:39:02 ET
Summary
- GMS's financial performance in Q2 FY24 was decent despite a slight decline in sales, attributed to lower demand in the single-family market and decreased sales of steel framing.
- The construction market conditions are improving, and GMS has potential for growth in the coming quarters, especially with the easing of mortgage rates.
- The stock price of GMS is at an all-time high, but it is advised to wait for a retest of the $75 level before investing for a better risk-to-reward trade.
The first time I wrote on GMS ( GMS ) was in March, and the last report I wrote on it was in September. I was still bullish on it last time, but the construction market was having a challenge in front of them, and it affected them in Q2 FY24. However, the market conditions are improving, and my future outlook for GMS is positive. Its stock price is at its all-time high, and I believe improving market conditions could be the reason for it. I think it has great potential. However, it might not be the best time to buy it. I will explain in this report how one can utilize this opportunity in the best way possible.
Financial Analysis
It recently posted its Q2 FY24 results . The net sales for Q2 FY24 were $1.4 billion, a slight decline of 0.7% compared to Q2 FY23. The major reason for the decline was lower demand in the single-family market and decreased sales of steel framing. The volumes of the single-family wallboard were down by 11.4% in Q2 FY24 compared to Q2 FY23. The sales of the steel framing were down 16.6% in Q2 FY24 compared to Q2 FY23. The reason for the decline was price deflation, which decreased the price and mix by 30.7%. Its gross margin for Q2 FY24 was 32.2%, which was 32.4% in Q2 FY23. The main reason for the decline was volatility in steel pricing.
The net income for Q2 FY24 was $80.9 million, a decline of 21.5% compared to Q2 FY23. The decline was mainly due to the cost related to acquisitions and higher wage expenses. Although its sales and margins were down in this quarter, I believe its financial performance was decent and the reason I am saying this is because in this quarter, the construction market in North America was struggling, and it was one of the worst times for the construction market. So even the slight decline in sales was appreciable. Now, talking about the future scenario, I think the worst is behind us, and GMS might perform better in the coming quarters. I am saying this because the mortgage rates are seeing a drop and are expected to drop even further. So, this is a positive for the construction market and GMS. In addition to boosting sales, it has acquired AMW Construction and added a new AMES. Acquiring businesses has been one of the major strategies to grow its business, and it looks like it has been continuing to work on it. So, considering the positive outlook for the construction market, my outlook for GMS is positive.
Technical Analysis
It is trading at $79.3. The chart of GMS looks perfect. It has broken its all-time high of $75 with a huge green candle. My last technical analysis of GMS worked quite well. The last time I covered it, I told you not to buy it at that level. Instead, wait for the retest, and after the retest was done, the stock rallied around 28%. Now, talking about the current situation, I am still bullish on GMS, and as it has broken its all-time high, there are no barriers or resistance zones to stop. So, I believe the stock will look for any highs now. But despite all the positives, I want investors to play smart here. I won't advise investing at the current level; instead, I would advise waiting for the retest of the $75 level. I always say that whenever a stock breaks its all-time highs, it often comes back for retest. So, investing at the retest will maximize your gains and will also provide a better risk-to-reward trade. So, in my opinion, when the stock comes back to $75 and if it makes a green candle, one can enter the stock because I think it has a great upside potential.
Should One Invest In GMS?
The majority of the companies that have their business in the construction market have struggled in 2023 in terms of financial performance and providing returns to investors. On the other hand, GMS has performed quite well. Its share price is at its all-time high, and I believe the reason behind the move in the stock in recent times is the easing mortgage rates and construction activity in North America. GMS has performed quite well in adverse market conditions, and if the market conditions improve in the future, then we might see a solid boost in GMS sales. Hence, my expectations for GMS are high, and I think it might do well in the coming quarters. However, despite the positive outlook, I would not recommend investing in it right now. Instead, I would advise buying it at the time of retest at the $75 level because of a better risk to reward. Hence, I assign a hold rating.
Risk
The amount of their operating costs, which have recently been subject to growing inflationary pressures, has an impact on their financial performance. If these expenses rise, they might not be able to fully or partially pass those increases on to their current and potential clients, which might have a serious negative effect on their operations, cash flows, financial condition, and business. Furthermore, their business plan includes an increased emphasis on increased profitability and productivity throughout the company. Their operational results and cash flows could suffer if they fail to promptly recognize the expected advantages of their cost-cutting and operational efficiency, or if their actual expenses prove to be higher than projected.
Bottom Line
GMS has performed quite well in adverse market conditions, and there are some signs of recovery that might boost its growth in the coming quarters, such as the easing of mortgage rates. My outlook is positive, and I think GMS has great potential for upside. But for now, I am assigning a hold rating on GMS due to the technical setup.
For further details see:
GMS Stock: Looking For New Highs (Technical Analysis)