If you had bought TopBuild Corp. (BLD, Financial) at the open on July 1, 2015 and held, you would have had what guru Peter Lynch calls a "10-bagger" less six and a half years later, on Nov. 23, 2021.
The first date was when TopBuild was spun off from Masco Corp. (MAS, Financial) and began trading on its own. The second was when TopBuild’s share price joined the market-wide slump that affected most stocks in 2022.
The price in 2015 was $27.95 a share. By Nov. 23, 2021, it had risen to $280, just $2.05 above a 10-fold increase. But the high did not last.
The stock bottomed out almost exactly a year later, but has been on the rise again. And while the share price may have taken a big dip, TopBuild’s revenue and earnings per share did not.
How has it maintained its ongoing increases on the top and bottom line, and will they continue?
As noted, TopBuild came into existence in July 2015, when it was spun off of Masco, a manufacturer of home improvement and building products. Masco focuses on plumbing fixtures, paints and other coatings, as well as builder hardware and lighting products.
According to TopBuild’s 10-K for 2022, one of its two segments specializes in the installation of insulation and provided 59% of 2022 revenue. It installs fiberglass batts and rolls, blown-in loose fill fiberglass, polyurethane spray foam and blown-in loose fill cellulose.
It has a second segment, Specialty Distribution, which contributed 41% of revenue last year. It has 162 distribution centers around the U.S. and Canada that handle building and mechanical insulation, insulation accessories, rain gutters and other products for residential, commercial and industrial markets.
That means it depends heavily on new construction, an industry that is fragmented, competitive and cyclical. Despite that, TopBuild enjoys several competitive advantages. They include the fact it has both insulation installation and specialty distribution businesses. This is said to allow the company to reach a broader set of customers more effectively.
Other components of its moat include scale, giving it leverage of systems, management and more. Its two segments provide two separate avenues to reach builders and contractors.
Regarding cyclicality, it reported in its annual filing that it mitigated some of the cyclicality of residential new home construction by moving into the commercial and industrial construction markets. It says commercial and industrial tends to follow different cycles than residential new construction.
The following five-year chart, with revenue (black) and Ebitda (green) lines showing the company was not affected by the pandemic-induced hard times of a couple years ago.
Nor does it appear that its fortunes have been affected by the current high interest rates, a traditional damper on construction activity. In its fourth-quarter and full-year 2022 results, it reported a 43.70% increase in sales. For the first quarter of 2023, it reported a year-over-year increase in sales of 8.20%.
Earnings per share without non-recurring items have also continued to grow over the past five years.
Summing up, revenue has grown by an average of 21.60% per year over the past five years, Ebitda by an average of 42.40% and earnings per share without NRI by an average of 33.20%. This is a company that has delivered serious growth.
Free cash flow, the foundation for growth, has rocketed up as well. It grew by an average of 42.20% per year over the past five years. TopBuild does not pay a dividend and its share repurchases are modest, so most of its cash flow can go into capital expenditures or other growth initiatives.
What has this meant from a shareholder’s perspective? First, the company has been creating value for investors, as shown in this chart of return on invested capital versus its weighted average cost of capital:
Second, it has an industry-leading (construction) return on equity. That is currently 27.21%, which is nearly double the industry median of 14.55%.
Is this overall growth sustainable? To start, I will refer you back to the revenue, Ebitda and earnings per share without NRI charts, which have risen steadily for the past five years, despite the pandemic and inflation.
Second, TopBuild has a healthy balance sheet that includes an interest coverage ratio of 13.26 and an Altman Z-Score of 3.45, which is above the safe zone mark of 3.
Third, it enjoys industry-leading margins, with the operating margin at 16.31% and the net margin at 11.31%.
However, Morningstar Inc. (MORN, Financial) data on the TopBuild Summary page estimates earnings per share without NRI of $14.90 for 2023. That would be down from the $17.54 reported for 2022 (bear in mind, though, that earnings per share without NRI jumped by 75.31% last year).
It also sees earnings of $15 per share for 2024, which is essentially a minor setback if inflation continues. All things considered, growth has been robust, but looking ahead, the analyst view is less optimistic.
While we are discussing fundamentals, GuruFocus gives TopBuild a 10 out of 10 ranking for value. It reached that ranking by dividing the current price, $214.47, by the estimate of fair value, $316.42. The GF Value considers TopBuild significantly undervalued currently based on its historical ratios, past financial performance and analysts' future earnings projections.
The price-earnings ratio is 11.93, which is somewhat better than the industry median of 14.17. Divide that by the five-year Ebitda growth rate of 42.40% and you have a PEG ratio of 0.28, which also indicates undervaluation.
And what about the gurus, are they big buyers? No, apparently not. According to 13F information, there were six gurus with TopBuild stock at the end of 2022.
The three biggest positions were those of Jim Simons (Trades, Portfolio)' Renaissance Technologies (94,500 shares), Paul Tudor Jones (Trades, Portfolio) of Tudor Investment (59,996 shares) and Jeremy Grantham (Trades, Portfolio) of GMO LLC (49,210 shares). Not major holdings at all.
Although the gurus show little enthusiasm, institutional investors do (gurus are a subset of the institutional investor's group). They owned 89.55% of shares outstanding, while insiders had 1.35%.
Investors should be aware that 13F filings do not give a complete picture of a firm’s holdings as the reports only include its positions in U.S. stocks and American depository receipts, but they can still provide valuable information. Further, the reports only reflect trades and holdings as of the most-recent portfolio filing date, which may or may not be held by the reporting firm today or even when this article was published.
In conclusion, TopBuild has a serious growth story for investors. The evidence for continued growth is in its ability to generate high margins, leading to robust cash flows. On the other side of the coin, the analyst estimates of future earnings suggest at least some caution.
