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TopBuild (BLD) Banks on Acquisitions, Material Costs High

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TopBuild Corp. (BLD - Free Report) has been banking on strategic acquisitions, strong Insulation Installation business, and strengthening repair and remodeling (R&R) activities. Also, solid prospects across the business and operational efficiencies are likely to help the company drive growth.

Its shares have increased 64.4% compared with the Zacks Building Products - Miscellaneous industry’s 51.9% growth over a year. The outperformance was driven by solid earnings surprise history, having surpassed the Zacks Consensus Estimates in 21 of the trailing 24 quarters. In 2021, earnings estimates have moved up 1.6% in the past 60 days, indicating a 40.4% year-over-year increase.

Further, improving U.S. housing market prospects will help this Zacks Rank #3 (Hold) company to post solid results going forward. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Let’s delve deeper.

Strong Housing Prospects: As U.S. housing market conditions and R&R activities are strengthening, TopBuild’s business is meant to grow and generate higher revenues. The U.S. homebuilding industry has been bullish owing to low mortgage rates.

Its first-quarter 2021 sales increased 13.7% year over year despite COVID-led disruptions. Encouragingly, adjusted earnings per share grew 47.4%, adjusted EBITDA was up 31.1% and adjusted EBITDA margin expanded 210 basis points from the prior-year comparable period. Impressive margin expansion led to increased profitability, depicting a flexible operating model and its ability to quickly reduce costs.

Accretive Acquisitions: Also, acquisitions have been an important part of TopBuild’s growth strategy. During first-quarter 2021, it acquired LCR Contractors and Ozark Foam, a residential and light commercial insulation company. Also, in April 2021, TopBuild closed the acquisitions of the American Building Systems Group of Companies and Creative Conservation. So far during 2021, the company completed four acquisitions that are expected to generate $217 million in annual revenues. In October 2020, it completed the acquisition of Garland Insulating, one of the largest locally owned and operated insulation installation companies in Texas.

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

Strong Installation Business: The Installation unit, which accounted for 71.5% of total 2020 net sales, installs insulation and other building products through the TruTeam contractor services business. For first-quarter 2021, the segment reported 12% net sales growth, with 120 basis-point improvement in adjusted operating margin. The upside was primarily driven by increased selling prices and sales volume, operational efficiencies along with synergies from acquisitions.

Solid Returns: TopBuild’s trailing 12-month return on equity (ROE) is indicative of growth potential. ROE for the trailing 12 months was 20.1% compared with the industry’s 10.5%, reflecting the company’s efficient usage of shareholders’ funds.

TopBuild — which shares space with Installed Building Products, Inc. (IBP - Free Report) , Arcosa, Inc. (ACA - Free Report) and Armstrong World Industries, Inc. (AWI - Free Report) in the industry — has a solid VGM Score of A. Our research shows that stocks with Growth Scores of A or B when combined with a Zacks Rank #1 or 2 (Buy) have the highest probability of success.

Material Cost Inflation: Higher raw material costs remain a concern for TopBuild. Costs of production and transportation remained high throughout 2020. During first-quarter 2021, the company persistently faced high input cost of raw material and increased labor expenses. Labor shortages and material constraints are stretching the building cycle and increasing the lag time. Cost of fiberglass increased frequently during the quarter.