2023-08-03 17:54:56 ET
Summary
- TopBuild Corp. has seen strong operating performance and has benefited from secular tailwinds in the housing market and insulation industry.
- The company's shares experienced a dip in 2022 due to the energy crisis and higher interest rates, but have since seen strong returns in 2023.
- TopBuild's recent acquisitions and strong financial performance suggest potential earnings accretion and a reasonable valuation at $290 per share.
In September, I believed that shares of TopBuild Corp. ( BLD ) were insulating value, as it had seen great operating performance, being accompanied by continued bolt-on dealmaking.
Benefiting from multiple secular tailwinds, that of a strong housing market, rising importance of insulation, and its role as consolidator in a fragmented industry, the long term outlook looked quite compelling.
With the energy crisis materializing in 2022 the outlook for TopBuild looked good, offset by the turmoil caused by higher interest rates on the housing market, notably new construction activity. This cast a real overhang on the shares in 2022, although shares have seen strong returns in 2023, as the business performance remains very resilient.
A Quick Recap
TopBuild long was part of Masco ( MAS ) but was spun off from its former parent in 2015, at the time a $20 stock. The buyer, installer, and distributor of insulation at the time was generating about $1.7 billion in sales accompanied by reasonable but not too impressive margins.
Spun off from its former parent, the company was thriving on the back of the trends already mentioned above. Environmental concerns and higher utility bills have certainly played a major role in recent years, providing another strong driver behind growth in the business.
Pre-pandemic, the company had already grown to a $2.8 billion revenue base, which generated $400 million in EBITDA and posted earnings of around $6 per share, as shares traded around the $120 mark at the time.
In the aftermath of the pandemic, shares traded in a $180-$220 range. That is when I last looked at the shares in September 2021. This came as the company announced some bolt-on deals along the way, pushing up sales to levels around $3.3 billion and EBITDA at nearly $600 million, as I pegged earnings power at close to $9-$10 per share.
Trading at $220, this resulted in a high valuation as the $7.7 billion enterprise valuations would see another jump as the company announced a $1 billion deal to acquire Distribution International in September 2021, adding another $747 million in sales. I pegged pro forma earnings around $12 per share, although this time accompanied by a 2.5 times leverage ratio.
Believing that valuations were a bit rich, I was looking for a dip, but the contrary happened as shares rose from $220 at the time to a high of $275 per share, before retreating to $150 in 2022, as that provided a decent dip (when I averaged around $170 per share).
2023 - Strong So Far
Since the start of this year, shares of TopBuild have risen from a low around $150 to the $200 mark in May, as shares rallied fiercely in recent weeks to a high around $290 now.
In February of the year, TopBuild reported a 44% increase in sales to $5.01 billion as operating profits rose in a largely similar fashion to $797 million. Net earnings of $556 million worked down to GAAP profits of $17.14 per share.
Net debt was down to $1.22 billion already which was comforting as full year adjusted EBITDA came in at $940 million, indicating that leverage was down to 1.3 times already, while earnings power was far stronger than I expected. This resulted in a mere 10 times earnings multiple at the time, but investors were fearful that a reversal in the housing market would weigh on the operating performance.
This in itself was expected by the business as well, as TopBuild guided for 2023 sales between $4.7 and $4.9 billion, which would mark a small decline in sales, with EBITDA seen between $820 and $910 million. At the midpoint, this could shave off $2-3 in earnings per share.
First quarter results were very resilient given this outlook with sales up 8% to $1.27 billion and margins improving, as quarterly earnings rose from $3.50 per share to $4.36 per share, all while net debt fell to $1.11 billion. While the company maintained the full year guidance, potential was emerging on the upside, that was clear.
In July, TopBuild announced the acquisition of Best Installation, a bolt-on deal although that a $100 million revenue contribution adds about 2% to pro forma sales, with few financial details announced.
Later that month, TopBuild announced a much larger deal as it paid $960 million to acquire Specialty Products & Insulation. The $703 million revenue contribution and $77 million EBITDA contribution will add meaningful to TopBuild. The acquired activities are split pretty evenly between new construction activity and maintenance & repair activity.
Pro forma net debt will jump to 2.0 times EBITDA, but we have seen the ability to deleverage quickly. While the earnings accretion is not quantified, most likely the company expects some kind of earnings accretion, certainly as $35-$40 million in costs synergies are anticipated, with those synergies being equivalent to little over a dollar on a pre-tax basis.
Early in August, the company posted a 3% increase in second quarter sales to $1.32 billion, with adjusted earnings per share up 18% to $5.25 per share. The company guided for full year sales at a midpoint of $5.10 billion with EBITDA seen at $975 million, but it is hard to exactly disentangle the hike in the guidance between organic growth and dealmaking efforts. Net debt was down to $913 million, set to double to $2 billion pro forma for the SPI deal, as indeed I see leverage around 2 times.
What Now?
The reality is that instead of declining earnings in 2023, we will likely see earnings accretion, and I do not rule out an $18-$20 earnings per share number for the year, albeit now accompanied by some leverage. This means that valuations look still reasonable at $290, yet we are at a great point in the cycle of course, and shares have seen huge momentum.
Given this backdrop, I am tempted to take some profits here, as 70% profits in the time frame of less than a year look quite impressive, making me a seller on further potential move higher. However, I continue to have great long term appreciation for TopBuild Corp. and its shares.
For further details see:
TopBuild: A Top And Well-Insulated Business