ferrantraite
ferrantraite
In August, I called TopBuild Corp. (NYSE:BLD) a top and well-insulated business. The company is a strong operator, benefiting from secular tailwinds driving the housing market, amidst greater importance of insulation for financial and ESG reasons.
While cyclical factors, including a massive interest rate spike in 2022, as well as an energy crisis, have certainly impacted the business, the performance remains impressive given the market circumstances.
Once part of Masco Corporation (MAS), TopBuild was spun off in 2015, at the time being just a $20 stock. The buyer, installer and distributor of insulation products posted $1.7 billion in sales at the time, accompanied by not too impressive margins.
Environmental concerns and higher utility bills have driven demand for insulation products, as the company grew to a $2.8 billion revenue base pre-pandemic, now accompanied by more impressive (EBITDA) margins around 15% of sales.
Greater organic growth and M&A actions drove further growth as 2022 sales rose to $5.0 billion, with EBITDA numbers of $940 million indicating that margins were up to the high-teens. Based on these spectacular numbers, the company posted GAAP earnings of $17 per share, with leverage ratios coming in at a very modest 1.3 times.
With shares trading around the $200 mark, expectations were low early in 2023, as the company and investors braced themselves for a normalization in the business. The company guided for 2023 sales to fall slightly to $4.8 billion at the midpoint of the guidance, with EBITDA seen around $865 million, as all this could reduce earnings by $2-$3 per share.
Over the summer the company announced some substantial acquisitions, including a $100 million revenue contribution from Best Installation, and a $703 million revenue contribution from Specialty Products & Insulation, boosting leverage ratios towards 2 times upon closing.
The company subsequently updated the full year sales guidance to $5.10 billion, but amidst the moving parts of dealmaking, it was hard to see which part of the hike was the result of acquisitions, and what part was attributable to a better operating performance.
With shares trading at $290 per share, I believed that an earnings number around $18-$20 per share might be in the works, leaving me with 70% profits in the time frame of less than a year, although that the performance was still very strong.
The company has grown to an impressive size, operating over 400 branches which employ some 14,000 workers. By now, the vast majority of sales are generated from insulation, complemented by gutters and other accessories. Some two-thirds of sale are geared towards residential markets, with the remainder tied to commercial and industrial markets.
In the end, shares kept rising as I trimmed my position around $350 per share in December of last year, as shares have risen further to $410 per share. In the fall, TopBuild posted resilient third quarter sales, hiking the full year sales guidance to a midpoint of $5.17 billion, with EBITDA now seen at $1.035 billion.
In February, TopBuild posted 2023 sales up nearly 4% to $5.19 billion, EBITDA at $1.05 billion, and net earnings at $614 million, equal to $19.33 per share. Net debt was down to $572 million, yet this is ahead of the Specialty's Products & Insulation deal, which still has to close.
With relative few and smaller acquisitions being made, the outlook for the current year is comforting. The company guides for 2024 sales at $5.46 billion, plus or minus a hundred million, with EBITDA seen up to $1.085 billion.
Important to consider is that this does not include the expected contribution of Specialty Products & Insulation, with modest growth seen, aided by lower interest rates. Moreover, the company will see a tiny uplift from yet another bolt-on deal, as it announced the acquisition of Pest Control Insulation in February, a transaction adding $24 million in sales, just less than half a percent of total revenues
Since September, shares of TopBuild Corp. have risen another 40%, now having doubled from levels seen early in 2023, and in fact seen as recent as October of last year. With earnings power for 2024 seen in the low $20s per share, valuations have re-rated to a high-tens to 20 times earnings multiples, all while leverage is very reasonable, even after the deal for Specialty Products & Insulation.
Amidst all this, I remain very impressed by the business, but find that the re-rating has been complete. A 20 times multiple does not look expensive for a solid operator with decent organic growth and M&A capabilities, yet margins have been very strong as a reversal in margin potential could weigh on the shares.
Given the massive run seen already for TopBuild Corp., I am happy to sit this one out for now, after getting out of the stock around $350 in December, as I will be keeping a close eye on the shares on big dips (if they might arise), but for here am comfortable to sit this story out.