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TopBuild Stock Up 113% Over a Year: What's Driving the Stock?

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TopBuild Corp.’s BLD shares have rallied nearly 113% in the past year, nearly three times the Zacks Building Products - Miscellaneous industry’s growth of approximately 38%. The outperformance was backed by strategic acquisitions, strong selling prices and strength in the Insulation Installation business. Also, solid prospects across the business and operational efficiencies are likely to drive growth.

Meanwhile, improving U.S. housing market prospects will help this Zacks Rank #2 (Buy) company to post solid results going forward. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Its solid earnings surprise history might also have supported the strong price movement. Its earnings surpassed the Zacks Consensus Estimate in 12 of the trailing 13 quarters.

Let’s delve deeper into the factors supporting the company’s solid price movement and prospects.

Strong Performance & Upbeat View

TopBuild’s shares have rallied high on the back of solid earnings and revenue growth over the last few quarters. Not only the top and bottom lines surpassed analysts’ expectation but also improved year over year. In fact, in the last three quarters, its sales and adjusted earnings per share grew 12.4% and 34.4%, respectively. Also, adjusted EBITDA margin expanded 210 basis points (bps) from the corresponding period of 2018.

Backed by last two months’ starts data and solid growth, the company raised its full-year 2019 housing starts guidance to 1.245-1.275 million from 1.23-1.27 million expected earlier.

Net sales are expected within $2.625-$2.645 billion, indicating 10.1-10.9% growth from 2018. Adjusted EBITDA is expected between $354 million and $360 million, suggesting an improvement from $283.4 million registered a year ago.

Notably, TopBuild has a three-five year EPS growth rate of 28% compared with the industry average of 14.3%. The company’s earnings for 2020 are expected to grow nearly 15.7%, while that of the industry is likely to grow 12.8%.

Strategic Initiatives

TopBuild has been undertaking a few initiatives to drive growth. These initiatives include acquisitions, divestures and driving shareholder value through repurchase programs.

On Jul 15, 2019, it acquired Burbank, CA-based Viking Insulation — an insulation installation company. Notably, it completed nine acquisitions in 2017 and 2018. The company expects solid improvement in net sales and earnings, and plans to invest more in these companies going forward.

In addition to acquisitions, it plans to close some low-margin businesses to focus on core areas in a bid to accelerate growth and improve shareholder value. In the first three quarters of 2019, TopBuild had returned 810,077 shares for $52.2 million through the repurchase program.

Strong Installation Business

The Installation unit, which accounted for 73% of total third-quarter 2019 net sales, installs insulation and other building products through the TruTeam contractor services business. In the first nine months of 2019, the segment recorded 17% net sales growth, with 180-bps improvement in adjusted operating margin. The upside was primarily driven by increased selling prices and sales volume, operational efficiencies, and synergies from the USI acquisition.

Solid VGM Score

TopBuild has a solid VGM Score of A. Our VGM Score identifies stocks that have the most attractive value, growth and momentum characteristics. In fact, our research shows that stocks with VGM Scores of A or B when combined with a Zacks Rank #1 or 2 make solid investment choices.

Moreover, the company — which shares space with Installed Building Products, Inc. IBP, Arcosa, Inc. (ACA - Free Report) and Armstrong World Industries, Inc. AWI in the industry — is a great pick in terms of value investment, supported by a Growth Score of A.

Higher Return on Equity

NVR’s trailing 12-month return on equity (ROE) is indicative of growth potential. ROE in the trailing 12 months is 16.2% compared with the industry’s 12.4%, reflecting the company’s efficient usage of its shareholders’ funds.

Again, a stock with beta less than 1 suggests that the stock’s price movement is not highly correlated with the market. Since it is less volatile than the market, the stock is a safer bet at the moment. TopBuild has an impressive beta of 0.79.

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