Construction Materials
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BLDR $60
28 Nov 2022 |
The ultimate contrarian play: Is Builders FirstSource worthy of a look?
Builders FirstSource (BLDR $60) is a pure play on one of the most (if not the most) distressed corners of the market: new home construction. The $9 billion Dallas-based company manufactures and supplies factory-built roof and floor trusses, wall panels and stairs, vinyl windows, custom millwork and trim, and engineered wood products to homebuilders of all sizes. When there is a housing boom underway, investing in the company makes perfect sense; but when the sector moves south, so does its share price. Case in point: Before the 2008 housing crisis, BLDR shares were trading around $25; in December of 2008, they hit $0.83. While Builders FirstSource certainly isn’t under the strain it was back in 2008, consider this: at $60 per share, the stock has a tiny multiple of 3.7 and a forward P/E of 3.4. Over the trailing twelve months, the company earned $2.8 billion from $23 billion in revenue. Investors may be leery of jumping in, but management is not: the company just boosted its stock buyback program by $1 billion. Between August of last year and prior to this latest buyback, the firm spent a massive $3.8 billion buying back 61 million shares of stock (30% of shares outstanding) at an average price of $63.05. Talk about being bullish on your future. With a presence in 85 of the top 100 metropolitan markets in the country, and with no single customer accounting for more than 6% of sales, it wouldn’t take much to move Builders FirstSource shares higher. While we don’t currently own the company in any Penn Strategy, we would place a fair value on the shares somewhere in the range of $80 to $100. |
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AFI $0.32
AWI $84 |
Armstrong Flooring paid out $4.8 million in bonuses to execs—then declared bankruptcy
(17 May 2022) The world of home flooring is one of those murky, opaque realms in which performing due diligence is extremely difficult—often by design. Take, for instance, a home buyer who wants to assure their builder uses wood flooring sourced from anywhere but China. Good luck. The company may be American, and their final products may be designed and even produced in the US, but that doesn’t mean the “cores” of factory-made materials didn’t come from the communist nation. Which leads us to a recent story about Armstrong Flooring (AFI $0.32). While we couldn’t readily determine what percentage of the company’s wood flooring materials emanated from China, at least they had the courage to admit—clearly on their website—that they do have a flooring plant in the Jiang Su Province of that country—in addition to plants in the US and Australia. We point this out because the company cited supply disruptions and higher transportation costs as two of the reasons it was forced to declare bankruptcy this past week. Never fear, though, as the company fully plans to continue operating while in bankruptcy while it devises plans to emerge. Armstrong told the Delaware court that it owed some $300 million to creditors and has roughly $500 million worth of assets, giving it a debt-to-equity ratio of 61.5%—up from 28.3% in March of 2020 and 17% in September of 2018. We are happy for the employees of Armstrong, but we must wonder how happy they were to learn that senior executives received some $4.8 million worth of annual incentives just before the company declared bankruptcy; incentives that would have almost certainly been disallowed by the courts. An Armstrong attorney told US Bankruptcy Judge Mary Walrath that these execs (the CEO and at least three others) were key in securing funding, but aren’t the employees key as well? It should be noted that the company’s CEO was the “chief sustainability officer” at Mohawk Industries between 2017 and 2019. It should also be noted that Armstrong had 1,600 employees as of the end of 2021. That $4.8 million would have meant a nice bonus of $3,000 for each, and we will even include the top executives in that package. We love American free enterprise, which is why we must hold all companies to the highest possible standard. We are not accusing Armstrong of doing anything illegal or even unethical, but companies that wave the American flag and wax eloquent about sustainability had better make sure they are practicing the ethics they preach. The last year Armstrong Flooring turned a profit was 2016, which happens to also be the year that Armstrong World Industries (AWI $84) offloaded the firm as its own publicly traded company, trading in the $19 range. These decisions don’t happen in a vacuum, and it behooves investors to look well beyond the glossy ads and company websites when reviewing a company for possible purchase. Pull up the rug and see what’s underneath, so to speak. |
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USG
BRK.B |
USG: With the help of Buffett (once again), another US company is snagged by a foreign buyer.
11 Jun 2018) The global mergers and acquisitions story reads a lot like global trade in that it is often a one-way street: rarely does the US intervene when a foreign entity wants to acquire a US company, but the barriers to a US company acquiring a foreign firm are often insurmountable. We have noticed that Warren Buffett often seems to be a cheerleader for the former deals, from Brazil's 3G Capital acquiring Heinz and Kraft, to the most recent one: Germany's Knauf KG gobbling up building materials firm USG (USG $26-$43-$43) for $7 billion. USG, formerly the United States Gypsum Company, has a rich history dating back to 1902, when 30 independent gypsum rock and plaster manufacturing companies merged to create a building powerhouse. Today, USG is a $6 billion company (well, $7 billion after the takeover bid) which manufactures and sells building materials around the world. "Sheetrock" is a USG brand, for example. Buffet's involvement? His Berkshire Hathaway owns 31% of the firm's outstanding shares, and that block is voting in favor of the deal. Under the terms of the agreement, current USG shareholders will receive $44 per share. That will certainly be a nice payday for Buffett's firm and its investors. We are sure he will stick around to make sure that Knauf keeps the USG headquarters in Chicago, and keeps the majority of the company's 6,800 workers employed. |
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EXP
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Under the Radar: Eagle Materials
(12 Oct 2017) Eagle Materials (EXP $74-$109-$111) is a $5.3 billion mid-cap supplier of building products for use in residential, industrial, and infrastructure projects. The company operates in five different segments, from cement and aggregates to oil and gas proppants (materials designed to keep an induced hydraulic fracture open). With sales of $1.2 billion last year, the company recorded net profits of $200 million. It is noteworthy that the company has also been profitable every year for the past decade. There are around one million homes in need of repairs from the recent hurricanes; Eagle Materials will provide a good portion of the supplies needed. |
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OC
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(20 Jun 2017) Stock of the Day. Quiz: what do all of those new homes going up around you have in common? There are plenty of builders to choose from when trying to take advantage of the housing boom, but there is one company that virtually all of them use for certain materials: Owens Corning (OC $46-$66-$66). The Pink Panther company makes insulation, roofing materials, and composites (think stone veneer on the fronts of those new homes) that are used by virtually all homebuilders around the country. With a market cap of just $7.4 billion, there is plenty of room for this mid-cap to grow, and the numbers are pointing to a strong 2017 for the firm. If the $1 trillion infrastructure plan comes to fruition, expect OC to reap a windfall. The company had profits of $393 million last year on revenues of $5.7 billion.
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