2023-10-24 23:55:19 ET
Summary
- TopBuild announced the acquisition of Specialty Products & Insulation for $960 million, which is expected to create significant synergies and further growth.
- TopBuild's stock has performed well in the market, with a CAGR of around 31% since its IPO in 2015.
- The company's financials show consistent growth and margin expansion, but the second half of 2023 is expected to be challenging.
- I believe that the company is currently priced fairly, considering TopBuild's future prospects.
TopBuild Corp. ( BLD ) sells and installs insulation in the United States. The company announced the acquisition of SPI in July. I believe that the acquisition should create a good amount of shareholder value as the add-on will create a good amount of synergies between the businesses. On the other hand, the stock already seems to price in a good performance for the stock – for the time being, I see a hold-rating as most reasonable.
The Company & Stock
TopBuild sells insulation to both individual and commercial homebuilding. Most of TopBuild’s revenues come from installation of insulation. Also, the residential channel represents almost two thirds of the company’s revenues:
Sales Breakdown (TopBuild Q2 Earnings Presentation)
The company announced the planned acquisition of Specialty Products & Insulation in July. The acquisition will be made in an all-cash deal totalling a price tag of $960 million. SPI is a distributor of mechanical and building insulation, adding to the share of TopBuild’s specialty distribution revenue segment. With figures from twelve months between April 2022 and March 2023, SPI’s revenues added up to $703 million , and the company’s adjusted EBITDA reached $77 million – the planned acquisition price adds up to an EV/adj. EBITDA multiple of 12.5, or a multiple of 7.6 after acquired tax assets and run-rate synergies of $35 million to $40 million two years after the acquisition. Considering the significant synergies and acquired tax assets, I believe the acquisition creates value for TopBuild’s shareholders.
So far, TopBuild’s acquisitions and overall performance have been immensely good for shareholders; the company’s strategy of using cash flows for acquisitions instead of dividends has worked as TopBuild’s stock has been an incredible investment so far on the stock market. From the company’s IPO in 2015, the stock has appreciated by a CAGR of around 31 percent:
Financials
From 2012 to 2022, TopBuild has achieved a compounded annual growth rate of 15.3% as a result of organic growth as well as acquisitions:
So far, 2023 has been slightly more difficult for TopBuild. In the first half of the year, the company’s revenues grew by 5.7%. The second half of the year is guided to be very difficult as the company guides for revenues between $5025 million and $5175 million – the middle point would imply that revenues will fall by almost 2% in H2.
TopBuild’s long-term margin performance has been nothing short of excellent. The company has scaled its EBIT margin from a negative figure in 2012 into a current trailing EBIT margin of 16.8% in a consistent fashion:
The margin expansion has been a result of both an increasing gross margin as well as scaling operations, creating SG&A synergies and benefits of scale. From 2012 to the current LTM figure, TopBuild’s gross margin has grown by 11.1 percentage points into a current level of 30.4%, with the rest of the leverage coming from SG&A improvements.
TopBuild has a good amount of long-term debt on the company’s balance sheet . Currently, the company’s long-term debt adds up to $1440 million, of which $45 million is in the current portion. As TopBuild completes the acquisition of SPI, the company will draw approximately $550 million of further delayed draw term loan. Other than the debt, the acquisition is financed by TopBuild’s cash reserves which currently stand at $526 million.
Valuation
TopBuild is currently priced at a forward P/E ratio of 12.0, around 28% below the five-year average of 16.6:
The P/E ratio alone doesn’t tell the whole story. To further analyse the valuation of TopBuild, I constructed a discounted cash flow model as usual. In the model, I only model in TopBuild’s organic performance – I don’t estimate the figures of the SPI acquisition into the model. For the current year, I estimate TopBuild to hit the middle point of the company’s revenue guidance of $5025 million to $5175 million, representing a growth of 1.8% for the year. After 2023, I estimate the market to recover from a very slight slump, as I estimate TopBuild’s revenues to grow by 7%. I believe the estimate is roughly in line with the company’s long-term achieved organic growth. After 2024, I estimate the growth to come down in slow steps into a perpetual growth rate of 2%. In total, the DCF model estimates an organic CAGR of 3.9% from 2022 to 2032.
For the company’s EBIT margin, I estimate slight further operating leverage. The estimates for leverage are still significantly below TopBuild’s achieved speed of margin expansion – I believe that the company shouldn’t be able to achieve too much further margin expansion as the company’s gross margin currently stands at 30.4%; further leverage would imply gross margin expansion or SG&A descaling, both of which I see as quite improbable on a large scale. In total, I estimate the margin to scale by a further 1.5 percentage points from 2022 to 2029, representing a 2029 EBIT margin of 17.4%.
The mentioned estimates along with a cost of capital of 12.86% craft the following DCF model estimating a fair value of $202.96 for the stock, around ten percent below the price at the time of writing:
The used weighed average cost of capital is derived from a capital asset pricing model:
CAPM (Author's Calculation)
In Q2, TopBuild had around $19 million in interest expenses. With the company’s current long-term debt balance, TopBuild’s interest rate comes up to 5.16%. I believe that the company will keep its debt-to-equity ratio around the current figure with a long-term estimate of 15%.
I use the United States’ 10-year bond yield of 4.87% as the risk-free rate on the cost of equity side. The equity risk premium of 5.91% is Professor Aswath Damodaran’s latest estimate made in July for the United States. Yahoo Finance estimates TopBuild’s beta at a figure of 1.57 – the figure is quite high, as newbuilding is quite cyclical in nature. Finally, I add a small liquidity premium of 0.3% into the cost of equity, crafting the figure at 14.45% and the WACC at 12.86%.
Takeaway
At the current price, TopBuild is priced for growth that is mostly in line with what the company has achieved long-term history. The pricing doesn’t estimate the speed of margin leverage that TopBuild has historically achieved, but as the margins seem to already be very high, I believe the estimate is constituted. My DCF model estimates slight downside for the stock, but I wouldn’t necessarily say that the stock is overpriced; the DCF model doesn’t account for the acquisition of SPI, which I believe will create shareholder value. For the time being, I have a hold-rating for the stock.
For further details see:
TopBuild: Building Future Topline Growth