2023-03-30 05:32:19 ET
Summary
- GMS posted a solid Q3 FY23 result with increased revenues and net income.
- They have entered the New York City market, spreading their business operations through an acquisition strategy.
- They are highly undervalued, and technical analysis indicates a solid upside potential for the stock price.
- I assign a buy rating on GMS.
GMS Inc ( GMS ) distributes steel framing and complementary construction products in North America. It provides ceiling products, mineral fibers, and metal ceiling systems. They also offer steel framing, lumber, wood, and several other interior construction and safety products. GMS recently posted its Q3 FY23 results. In this report, I will analyze its financial performance and talk about its growth potential. In my view, they are undervalued and have a lot of growth potential. So I assign a buy rating on GMS.
Financial Analysis
GMS recently announced its Q3 FY23 results . The net sales for Q3 FY23 were $1.2 billion, a rise of 7% compared to Q3 FY22. I believe the main reason behind the rise was increased sales of commercial wallboard, ceilings, and complementary products. The sales of commercial wallboard, ceilings, and complementary products increased by 20.6%, 4.9%, and 11.7% in Q3 FY22 compared to Q3 FY22. I believe the sales of commercial wallboard and ceilings increased due to higher pricing and mix benefits. I think sales of complementary products increased due to the positive contributions from the done by them acquisitions and improved pricing policy. The gross profit margin in Q3 FY23 was 32.5% which was 31.8% in Q3 FY22. I believe better-than-expected margins in the steel framing segment and increased multi-family construction activity were the main reasons behind increased gross profit margins.
The net income for Q3 FY23 was $64.7 million, a rise of 5.5% compared to Q3 FY22. Even after a decline in sales of steel framing and a slowdown in the single-family construction segment, their revenues and net income increased, which is quite impressive.
Technical Analysis
GMS is trading at the level of $55.5. It is above its 200 ema, which indicates that it is in an uptrend. Since October 2022, it has risen 45% and is currently near a resistance zone of $56. If it breaks $56, then I believe it can reach $61, which is an all-time high for the stock. Looking at the solid fundamentals and bullish chart, I believe if it can break its all-time high of $61, then it has the potential to reach $70 in the coming times. So, in my opinion, once it breaks the resistance zone of $56 in a daily time frame, then one can enter the stock with a long-term target of $70.
Should One Invest In GMS?
The revenue estimate for FY23 is around $5.3 billion, which is 14.5% higher than FY22 revenue. The management has adopted an acquisition strategy to grow its business. They recently entered the New York City market when they acquired Tanner Bolt and Nut; this acquisition has added four metro locations. These acquisitions will help them to expand their tools and fastener offerings. I believe these acquisitions might significantly increase their revenues and net income because New York City has a vast market to offer. In addition, they opened six new greenfields in FY23. The acquisition strategy shows that the management is dedicated to growing the business. The company expects the demand in the single-family construction segment will remain low. Still, I expect strength in the multi-family construction segment might remain strong. In addition, the company's efforts to expand its complementary products portfolio might help them in coming quarters. So I believe the softening demand in single-family construction would not have much effect on its financial performance. Considering all these factors, I believe they might achieve the revenue targets.
Now looking at its valuation. I will use EV / Sales and P/E ratios to judge its valuation. A firm's Price / Earnings ratio is calculated by dividing a firm's share price by EPS. GMS has a P/E ((FWD)) ratio of 6.18x compared to the sector ratio of 16.42x. GMS has an EV / Sales ((FWD)) ratio of 0.66x compared to the sector ratio of 1.60x. We get the EV / Sales ratio by dividing a company's enterprise value by its annual revenue. After looking at both ratios, I believe they are undervalued and have excellent growth potential. In addition, Quant has an A grade for its valuation, which I agree with. Considering its growth rate and future estimates, I believe they are undervalued.
Risk
A sizable portion of its business is distributing its products, especially wallboard, to residential contractors. As a result, wallboard demand is closely correlated with housing starts, even though its cyclicality has traditionally been somewhat muted by R&R activity. Housing demand, housing inventory levels, housing affordability, mortgage rates, building mix between single-family and multi-family homes, foreclosure rates, geographic shifts in the population and other changes in demographics, the availability of land, local zoning and permitting procedures, the availability of construction financing, the health of the economy and mortgage market, are all factors that affect housing starts and R&R activity. Any of these variables that are unfavorable and beyond their control could have an adverse impact on consumer spending. This might adversely affect the financial performance of the company.
Bottom Line
Every aspect of the company looks perfect. They reported strong quarterly results, and the management's guidance suggests that they expect their revenues to grow significantly. In addition, they are undervalued when compared to the sector standards. I believe they are on a significant growth trajectory and might provide significant returns to their investors. Hence after analyzing all the aspects, I assign a buy rating on GMS.
For further details see:
GMS: Strong Fundamentals With A Great Growth Trajectory