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TopBuild (BLD) Gains From TruTeam Amid Higher Costs & Delays

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TopBuild Corp. (BLD - Free Report) has been gaining strength from its Insulation Installation business and systematic inorganic strategy. Also, solid U.S. housing market momentum bodes well. However, coronavirus-related delays, higher material costs and lower volumes are causes of concern.

Major Growth Drivers

Solid Installation (TruTeam) Business: The Installation segment (which accounted for 71.5% of total 2020 net sales) installs insulation and other building products through the TruTeam contractor services business, which had nearly 200 branches located in 40 states as of Dec 31, 2020. The segment’s revenues grew 109.8% in 2020. During the year, TruTeam’s adjusted operating margin improved 200 basis points to 15.3%. The segment has been benefiting from volume growth, revenues from acquisitions and a richer mix of single-family homes.

Inorganic Moves: Acquisitions are an important part of TopBuild’s growth strategy to supplement its organic growth and expand access to additional markets and products. The company has a strong pipeline of prospective acquisitions mainly focused on the insulation business. In March 2021, the company acquired Ozark Foam, a residential and light commercial insulation company. Also, TopBuild intends to acquire the American Building Systems Group of Companies (ABS). The transaction, which is expected to be completed early in second-quarter 2021, will expand its presence in the East Coast. In 2020, the company completed three acquisitions that are expected to generate $79 million in annual revenues. In October 2020, the company completed the acquisition of Garland Insulating, one of the largest locally owned and operated insulation installation companies in Texas.

The acquisition of Hunter Insulation, Cooper Glass, and Garland Insulating will mark the company’s footprint in the high growth markets of Texas, Colorado and Tennessee.

Apart from acquisitions, the company plans to close some low-margin businesses to focus on its core areas in a bid to accelerate growth and improve shareholder value.

Improved Residential Construction Market: Declining mortgage rates have been driving the U.S. housing industry in recent times. Overall, the U.S. housing market seems to be back on track, defying headwinds like low inventory levels, tight lending conditions, and broad-based economic as well as public health risks associated with the pandemic. Revival of housing demand has been a boon for companies like TopBuild, Advanced Drainage Systems, Inc. (WMS - Free Report) , Masco (MAS - Free Report) , Installed Building Products (IBP - Free Report) and others from the same industry.

Headwinds

Project Delays: TopBuild has been witnessing negative impacts of coronavirus-induced shutdown. The company has been experiencing delays in some of its commercial projects due to social distancing protocols. Although it remains confident about long-term growth of the commercial business, commercial recovery is expected to be slower than residential.

Raw Material Inflation: Higher raw material costs remain a concern for TopBuild. In 2020, inflation in material costs impacted the business. Costs of production and transportation remained high throughout the year. Labor shortages and material constraints have been stretching the building cycle and increasing the lag time.

Although the company has been working to recover higher commodity costs through price increases, ongoing volatility in material costs and tightened capacity remain concerns.

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