|Shares Out. (in M):||9||P/E||5||3|
|Market Cap (in $M):||118||P/FCF||5||3|
|Net Debt (in $M):||210||EBIT||34||60|
BlueLinx Holdings Inc. (“BlueLinx”, or the “Company”) was written up roughly two years ago on VIC. Despite the fact that shares have more than doubled since then (on a split-adjusted basis), and are up more than 60% since a near-term bottom three months ago, I believe that they still have plenty of room to appreciate in the near-to-medium term. BlueLinx has the combined advantages of i) significant industry tailwinds, ii) a major self-help margin improvement story, iii) a rapidly improving credit profile, and iv) a P/E multiple that is arguably only 3x a couple of years out. Opportunities like this have become increasingly difficult to find in the current market environment.
BlueLinx is a distributor of building products. Close to 40% of the Company’s revenue comes from distribution of structural products (plywood, strand board, rebar, lumber), with the balance generated from a broad range of other products including roofing materials, insulation, molding, and vinyl siding. The Company does business out of 39 distribution centers located in the central and eastern U.S., distributing over 10,000 SKUs to thousands of end customers. BlueLinx is what is known as a two-step distributor, effectively operating as a middleman between hundreds of different building products manufacturers and building products retailers, industrial manufacturers, and manufactured housing providers. The Company’s building products retail customers include regional dealers (Carter Lumber, Hammond Lumber), national dealers (Builders FirstSource, BMC, 84 Lumber), and home improvement centers (Lowe’s, Home Depot). Competitors include both the captive distribution arms of large forest products companies (Boise Cascade, Weyerhauser) as well as other independent two-step distributors like Huttig Building Products. The sustainability and necessity of the two-step distribution model has often been questioned; however, it has persisted in the building products space. I personally think of it as an outsourced inventory management function, whereby building products end-retailers who do not necessarily want to purchase in “bulk” (due to storage limitations and/or financial considerations), pay a small fee to effectively rent the two-step distributors’ storage space and balance sheet. The two-step distributor then provides order management, less-than-truckload delivery service, and stocking services while passing on some of the bulk pricing discounts that it is able to negotiate. Two-step distributors also often provide milling and fabrication services, whereby they take standard-sized building components (like doors), and resize them for the specific needs of a given retailer and/or manufacturer.
BlueLinx began its corporate life in 1954 as Georgia-Pacific’s captive plywood distribution arm. Over the subsequent 50 years, it grew from its initial base of 13 distribution centers to encompass 60 distribution centers, before being sold in early 2004 to Cerberus Capital Management (“Cerberus”). Cerberus took the Company public later that same year, selling half of its ownership stake. Several years thereafter, like many of its competitors, BlueLinx was hit hard by the U.S. housing crisis. The business subsequently continued to limp along, ultimately undertaking a series of equity financings between 2011 and 2013 to help ease its stressed balance sheet.
In 2014 BlueLinx brought in a new CEO, Mitchell Lewis. Since arriving, Mr. Lewis has replaced the senior management team and moved aggressively to both restructure and reposition the Company. He has reduced the fixed cost base by shuttering over 20% of the 50 distribution centers that were in operation when he arrived. In addition, he has refocused the sales effort from a volume orientation to one driven by profitability. This pivot has meaningfully reduced working capital intensity, which has in turn yielded improvements in the Company’s return on invested capital. The focus on profitability has helped drive a near-doubling of the Company’s operating margins, with EBITDA margins expanding from 1.1% in 2014 to 2.1% on an LTM basis.
Despite these improvements, a cursory look at the Company’s financials makes it appear as if the business is one with a challenged top line and substantial financial leverage. This combination leads to quick dismissal by many potential investors. The underlying reality, though, is more nuanced.
BlueLinx has indeed shown consistent revenue declines for the past four years running. However, this has been driven by the aforementioned aggressive closure of unprofitable and marginally profitable distribution centers. On a same-center basis, sales have been growing in the mid-single-digit range. More importantly, same-center profitability is up by nearly 150% over this time period.
Stated leverage ratios are likewise misleading. BlueLinx currently has roughly $40mm of run-rate EBITDA and had over $300mm of debt as of the last filed balance sheet (Sep 30, 2017), thus implying a leverage ratio >8x. This simple analysis, though, fails to account for an aggressive ongoing sale-leaseback strategy which management has undertaken with its owned real estate. Most of these centers are on prime industrial real estate, with adjacency to major rail lines. Some, in major metropolitan areas, have also attracted interest for residential development projects. The Company has multiple independent appraisals of its owned real-estate which it claims support an aggregate fair market value for that real estate that exceeds its book value by approximately $250mm. This excess value has been supported to-date by sale-leaseback transactions of multiple facilities. Most recently, the Company executed a sale-leaseback of four properties earlier this month that netted $110mm in proceeds. Note that this $110mm in proceeds effectively represented the entirety of the net book value of all 37 owned facilities prior to the sale. While the Company admittedly has likely been doing sale-leaseback transaction on the most valuable properties first, the $250mm in mark-to-market guidance may well prove conservative. The $110mm in proceeds from the recent sale-leaseback has been used to retire an outstanding $98mm mortgage (which was the highest cost debt @ 6.35%); pro-forma for this transaction the leverage ratio should drop to <6x. With the Company continuing to wholly-own 33 of its distribution centers, I would expect further rapid improvement in the leverage ratio as the SL strategy progresses.
Management’s playbook from here is to continue its focus on profitability, driving further margin gains, while continuing to delever through additional sale-leaseback transactions. With respect to modeling, I don’t find comparisons of absolute gross margin levels between competitors particularly instructive, as the mix of value-added vs. pure distribution revenues can differ considerably between companies (to the extent it is even disclosed). Thus, I have instead chosen to look at the margin improvement profile for competitor Huttig. Several years ago, Huttig undertook a similar shift from a volume-orientation to one focused on product line profitability. This yielded a 250bp improvement in its gross margin over roughly five years. BlueLinx, by contrast, is only part way through this process, having to-date improved gross margin by roughly 100bp over a three-year period. Thus, I believe there is still ample room for margin improvement.
At the same time that the Company continues to drive the self-help story on the margin front, it should benefit from ongoing improvement in the single-family housing market. With 2017 single family starts in the 835-850k range, the market is still 20-25% below a normalized number of single family starts somewhere north of 1mm. Single family permits continue to trend nicely (up high single to low double digits), homebuilder sentiment is at its highest level since before the collapse, and ongoing favorable wage and employment trends may finally start driving household formation and home ownership levels back towards historical averages. Optically, with the footprint rationalization now largely complete, BlueLinx should start showing revenue growth on a reported basis, negating the cursory assessments (and quant screens) which seem to show a declining business.
Putting all this together, I see revenue growing from $1.8bn (2017) to $2.3bn in a normalized single-family housing environment. Pro-forma for the recent $110mm sale-leaseback, the Company is doing roughly $35mm in run-rate EBITDA (assuming $4-5mm in rent on the sold facilities), for an implied pro-forma margin of 1.9%. I believe that it can get that to 3.0% through a combination of continued focus on product line profitability + some operating leverage. This yields the following P&L (in mm except per-share amounts):
Revenue 2,300 (25% growth from current; single family housing normalization + some SSS growth)
EBITDA 69 (3.0% margin, 110bp improvement from current)
D&A 10 (run-rate)
Int exp 9 ($220mm @ 4% on revolver)
Net income 38 (assume 25% blended rate)
EPS $4.10/shr (9.1mm shrs)
Cash EPS $4.75 ($6mm favorable spread between D&A and normalized capex)
Admittedly, these are rough numbers, but I feel like they are order-of-magnitude achievable. What is a fair multiple for normalized earnings in a mediocre business? Pick your number, but it’s likely well in excess of 3x. Moreover, with book value per share somewhere north of $20 after marking real estate to market, there should be reasonable downside protection even after the recent run-up.
Below is a very simple look at the Company’s earnings power for 2017, 2018, and on a normalized basis at various margin levels. Note that even w/out meaningful margin expansion the shares look reasonably cheap at <6x cash earnings. For those more partial to EV:EBITDA multiples, pro forma for the recent $110mm SL the shares are roughly 7x on 2018 numbers and 5x on a normalized basis.
A few additional random comments:
Cerberus exited its entire stake in October. This drove the stock from $10/shr to $8/shr. While the exit of a control shareholder might normally be cause for concern, in this case not only had Cerberus held the investment for over 13 years – well beyond its normal holding period – but the aggregate value of its stake ($35mm) was relatively meaningless in the context of its overall portfolio. With the free float now doubled, liquidity (although still limited) has improved to the point that a significantly larger group of institutional investors will at least find it worth their while to take a look. Further ameliorating the signal sent by the Cerberus sale, senior members of management have subsequently made several large open market purchases.
The Company sits on a sizable cache of NOLs ($164mm per verbiage on the last conference call). Cerberus’ sale of its control stake was an incremental negative for the value of these NOLs, given that change of control provisions now kick in. However, my understanding is that these limitations do NOT apply to the extent the NOLs are used to offset gains from sale of real estate. This is good news, as gains on sale-leaseback transactions are likely to eat up most, if not all, of these NOLs over the next couple of years.
As mentioned, I wouldn’t qualify this as a high quality business. That said, as the SL strategy unfolds, I can see it generating low double digit ROICs (10-11%) and 20%ish ROEs on a normalize basis (and after marking real estate to market).
Continued margin expansion; improved trading liquidity; additional sale-leasebacks; delevering
|Entry||01/25/2018 04:53 PM|
i actually think you're being conservative in your operating leverage assumptions. with the leverage issue now in the past and the shareholder overhang gone there's really no reason this shouldn't be at least at 10x cash eps given a growth profile that'll likely double earnings in the next three years. i also think you're operating leverage assumptions are conservative and mid cycle earnings can get to $7 plus, and 10x on that would obviously be a $70+ stock price.
if i didn't know where this stock had been, i'd be a buyer all day at $20 confident it'd be on its way to $40 pretty quick as the j-curve of the eps growth hits this year and next.
|Entry||01/26/2018 02:47 PM|
Thanks for the writeup and great idea. I don't think the company breaks out effects of pricing vs volume on sales growth as they did the past - any view on lumber prices and how sensitive BXC is?
|Entry||01/26/2018 03:35 PM|
You are correct. They no longer break out the specifics of price vs. volume. They talk in their filings about "volumes" being up or down, but that is about it, and it isn't really clear whether they actually mean unit volumes or overall sales volume (i.e. revenue). Occasionally on the calls they get asked a question looking for detail on price vs. volume, and they will answer it, but never with specifics. Just general directional comments, i.e. "volumes were up but we had some headwind on pricing."
For calendar 2016, roughly 40% of their sales were of structural products, which are those most exposed to lumber pricing trends. That percentage was steady from 2014-16, although is way down from what it was prior to the housing collapse.
For the structural/commodity piece of the business, I would expect them to have some inventory pricing tailwind in a rising price environment, and the converse in a falling price environment. That said, mgmt has worked hard to lower overall exposure to commodity price fluctuations by turning inventory more quickly (thereby lowering commodity inventory whose value swings around with price changes), and continuing its focus on higher margin products.
By way of illustration, between 2014 and 2015 lumber pricing was falling, but the company still managed to increase overall margins. Admittedly, recent margin expansion has been more robust (than what they saw in 2014-15), and that period post-2015 has generally been a rising lumber price environment, so it would probably be a reasonable conclusion that the pricing environment has helped somewhat.
Here is a 5-year chart of generic lumber pricing:
|Entry||02/26/2018 12:43 PM|
Hi, I have a few of questions:
1) First, is there any customer concentration at all? I do not see anything listed on the 10-K and your comments above suggest thousands of end-customers. But, just to be sure, any sense what % the largest customers are -- for example, hammond or carter or HD/LOW? Do any of these even approach 5% or 10%?
2) Are there further working capital and fixed cost (sg&a) reductions ahead or is the company all done with those? If further cuts are possible, any sense on quantifying what is possible? This is such a sliver of an equity, that any improvements in these would have outsize impact on returns and stock price.
3) Any sense of how to quantify the impact of the SLB strategy on capex and D&A?
4) what would your expectation be around the impact of tarrifs on canadian lumber or on chinese steel (i.e., rebar). I would think any inflation caused by these would actually be a positive relative to the company's fixed costs, but maybe there would be some short-term volatility as the company works to pass through full price increases, should they occur?
|Subject||Re: some questions|
|Entry||02/26/2018 01:23 PM|
1) I don't have a definitive answer on this one. As you noted (per the 10-K), no customers currently reach the SEC 10% threshold. I have heard anecdotally that there isn't any meaningful customer concentration, but "meaningful" is obviously open to interpretation. Management has told me that Home Depot is a "key" customer.
2) Yes, I believe there are further working capital improvements to be made. Per management, there are still efficiencies to be realized on the inventory line as the return on capital metrics were only introduced within the past couple of years. Additionally, they believe that they can generate further progress on payables as many suppliers were cautious about extending credit in the past given perceived financial distress. I am not assuming that they make further absolute cuts in G&A, however, the line item is absolutely leveragable and with comps/top line going positive in aggregate they should see some benefit going forward.
3) Management has indicated that $2-3mm in annual capex is a good number to use. This is above the last few years as they catch up on some projects that they had deferred, but is well below D&A run-rate of $9mm. D&A should come down as well with the SLB strategy, but I don't know how much yet. We should get some detail on the upcoming call.
4) I agree that anything driving price inflation is a positive all things equal; the offset is that to the extent tariffs meaningfully sap demand it will be a headwind.
|Subject||Re: some questions|
|Entry||02/26/2018 01:25 PM|
Just to be clear on #4, a rising price environment should be good for BXC as they are net long inventory. To the extent there is pass-thru risk, it should really only be a headwind in a falling price environment.
|Subject||Re: Re: some questions|
|Entry||02/26/2018 02:56 PM|
Thanks! A couple more questions:
1) Any thoughts on the stock pullback over the last couple weeks. sems to roughly correlate with stiocknweakness at HBP, but that likely resulted from the CFO change....
2) Also, I just read through the transcript of the call from back in November and they seemed confident in "total real estate value in excess of $250 million". Given that they sold just 4 properties for $110M in January and that the $250M assessment was done several years ago, I am trying to assess just how much "in excess" could really mean.
One rough calculation I looked at is the four properties comprised 2.3M sq. feet according to the purchaser's PR, so they sold for about $48/sq. foot. BXC had 9.3m sq feet of owned buildings as of 12/31/16, so they have approx 7.0m left (minus the 4-5 small facilities sold in early 2017). At $48/ sq foot, that would yield $336M for the balance, though the properties may vary based on whether they come with land that could be used for development, etc....
Any thoughts on this?
|Subject||Re: Re: Re: some questions|
|Entry||02/26/2018 03:12 PM|
1) I don't have any definitive insight into the stock pullback, although expect it may have to do with some folks taking gains ahead of earnings later this week. The shares are way up off the bottom, and to be honest, have been fighting a brutal tape in homebuilders and homebuilding supply companies over the past month. The homebuilders and suppliers have traded off hard as the 10-yr has started creeping up, and until recently BXC had been fighting this trend. Given the relative illiquidity, it doesn't take many sellers to gap this down (doubled-edged sword, of course, works nicely on the way up as well).
2) $20,000 question...I put a call into management after the SLB of the four properties was announced in January. I had assumed that these were the best four available (and hence, easiest remaining to get SLB done), and was hoping to get some additional color, but they were unwilling to disclose anything other than what was in the press release and 8-K. Again, guessing that we get additional color on the upcoming earnings call. Overall I think that your math is reasonable, although to my prior point I would personally ding the value/foot a bit assuming that the four sold were some of the better properties. In any case, there is a lot of wiggle room to get them back up to >$20/shr in adj book value. Also worth keeping in mind that there are no restrictions on their ability to use existing NOLs to offset real estate sales. For some loophole reason, change of control provisions do not apply in that case.
|Subject||Re: Re: Re: Re: some questions|
|Entry||02/26/2018 03:45 PM|
On the asset values, I did some further digging. What's interesting is that the transaction in January is NOT their first asset sale under their deleveraging program. If you loook back in 2016, they sold a bunch of properties as well. The proceeds aggregate to $32.2M. Further, if you take a look at the sq footage of their owned properties at the end of 2015 and the end of 2016, you can see that their footprint was reduced by 850,000 square feet. so, the properties sold in 2016 for an average of $38/sq foot. In short, the January 2017 transaction was done at $48 per sq. foot & the properties sold in 2016 were done at $38 per square foot. This should give us a good range and suggests that EVEN AFTER the transaction in January, they would have property valued somewhere between $241M ($38/foot * &m sq feet -$25m of early 2017 property sales) and $311M ($48/foot * 7M sq feet- $25m in early 2017 property sales).
The only thing I do not know with regard to the low-end of this calculation is whether the change of 850,000 square feet could be a net numnber insofar as it is possible that they bought a facility and the 850,000 is a "net" number, which would imply a lower $/sq foot for their 2016 sales. However, i did not find any reference to an asset purchase and it doesnt make much sense given that they have been in a deleveraging mode the last few years.
Even if you assume a 20% haircut to the 2016 price per sq foot ($38), despite two years of increased real estate values, there is still $188M of value left after the January 2017 transaction....
|Subject||Re: Re: Re: Re: some questions|
|Entry||02/26/2018 03:46 PM|
Good thoughts re the stock action which has been interesting to say the least. It hit a multi-year high at one point last week near $17 and then went straight down the last couple days. Have to think profit taking ahead of EPS is part of it, but I'd think Cerberus probably also just got rid of that last ~270k shares they held (which they reportedly kept to avoid triggering some clause on the mortgage to avoid a penalty to BXC). If I recall correctly there was a 90 day lock up on that which seems to coincide with the weakness.
|Subject||Re: Re: Re: Re: Re: Re: some questions|
|Entry||03/01/2018 03:56 PM|
I was only able to half listen to the call, but seems like they could easily do over $2 in eps this year. Are you cominng out much differently? 4q was their best quarter of the year based on EBITDA improvement. It was a really good quarter.
|Subject||Re: Re: Re: Re: Re: Re: Re: some questions|
|Entry||03/01/2018 04:43 PM|
Yeah, I've got them doing $2.00/shr fully-taxed (25% rate), and >$2.50/shr on a cash EPS basis (adding back excess non-economic amortization). That only assumes 20bp of incremental EBIT margin improvement, which is conservative vis-a-vis the improvements they have been clocking recently.
My only caveat is that there is a disconnect between what I am modeling for the $110mm sale-leaseback impact and what I think I heard them say on the call. Need to speak w/Company. Will update board if/when I get some clarity.
|Subject||Re: Re: Re: Re: Re: Re: Re: Re: some questions|
|Entry||03/01/2018 05:08 PM|
Agree, stock is still too cheap on both a levered (~8% yield) and on an unlevered (~14% yield) FCF basis and I am starting only with $40MM of EBITDA for my calc. Every 20bps adds another ~$3.6 to EBITDA. None of that really contemplates the incremenal $150-160MM (~$16 per share) of residual real estate value on the books.
ZZZ007, thanks in advance of letting us know about the SLB impact. I was a bit confused as well.
Without a stretch, this stock really should be trading at at least $20. I wish mgmt could have walked us through the numbers pro forma for the impact of the last SLB and laid out the cash flows pro forma, but I guess that is our job.
I am hopeful they will attempt to articulate this to investors going forward because it seems that the market really isnt paying much attention here.
I've had an easier time scheduling investor calls with most $.5-10BN companies....
|Subject||Re: Re: Re: Re: Re: Re: Re: Re: Re: Re: some questions|
|Entry||03/02/2018 12:14 AM|
Not sure why you are using only $40m in ebitda. Maybe that was the TTM number before they reported 4Q? They now have reported $44M Ebitda for 2017. My back-of-the-envelope is $52M for 2018 (assumes just 3.5% rev growth which they should do from inflation alone and 35 bips of margin improvement, despite target of 50). Also assumes SLB transaction flows through P&L in interest expense and depr/amort lines rather than as rental expense.
|Subject||Re: Re: Re: Re: Re: Re: Re: Re: Re: Re: Re: some questions|
|Entry||03/02/2018 01:08 AM|
Just being conservative to illlustrate my point that the stock is extremely mispriced.
|Subject||wow -anyone lese taken a look at the accretion on this?|
|Entry||03/12/2018 09:39 AM|
has anyone worked through the nums on the merger announced today? Looks amazing. Sounds like, just from operations (i.e., not incl any asset sales) they think they can generate about $190M in fcf over the enxt 18 months (equates to over $20/share).
|Subject||Re: wow -anyone lese taken a look at the accretion on this?|
|Entry||03/12/2018 11:02 AM|
From am coming up with $6 of free cash flow to the equity w/o synergies and $9.88 with synergies. 9.4% ULFCF / EV (no synergies), 13.7% (w/synergies) with the stock at $25. Thoughts?
|Subject||Re: Re: wow -anyone lese taken a look at the accretion on this?|
|Entry||03/12/2018 11:11 AM|
my numbers are on top of yours. that's with almost no growth. my math on the standalone had them doing $5 in a couple years, so that pro forma number goes to nearly $13/share by 2020. Even up at $30 this thing is the cheapest housing stock I know of. Could easily be at $100 per share by year end. What a home run deal.
|Subject||Re: Re: Re: wow -anyone lese taken a look at the accretion on this?|
|Entry||03/12/2018 11:24 AM|
So very simple math:
$150mm PF EBITDA
Less $10mm economic D&A (i.e. capex)
= $140mm econ EBIT
Less $35mm int expense ($400m @ 4.5%, $180mm @ 9.5%...gives some wiggle room by assuming LIBOR keeps rising from current levels)
= $110mm pre-tax
25% tax rate = >$80mm econ NI (FCF) = $8/shr
The missing piece is that I still don't really understand how much addl interest expense is going to be coming through as a result of cap leases. Let's assume $100mm SLB (Jan) + $68mm new cap lease = $168mm total @ 9% (seems high...) = $15mm additional interest expense. Tax @ 25% = $11mm hit to NI is ~ $1/shr.
So maybe real FCF is closer to $7 on PF run-rate basis???
And this is before revenue synergies, no addl credit for cost save >$50mm, addl margin expansion, operating leverage, growth, etc.
Just some super rough nums.
|Subject||Re: Re: Re: wow -anyone lese taken a look at the accretion on this?|
|Entry||03/12/2018 11:26 AM|
Agreed. Even if this company were losing money and FCF breakeven (which is far from the case), I think the equity would be trading at 10% of sales which would be $35/share.... Could easily get to $100 and its not a stretch that could get to $200 over the next several years if housing cycle continues back to trend line, along with deleveraging....
|Subject||Re: BLDR/ProBuild redux / more simple math|
|Entry||03/12/2018 02:02 PM|
Azia, in terms of fair valuation, I think you are likely low:
|Subject||Re: Re: BLDR/ProBuild redux / more simple math|
|Entry||03/12/2018 02:27 PM|
For sure. Intentionally being draconian to illustrate the dislocation here. I think it was pretty clear on the call that mgmt expects substantially more than $50m in cost synergies (I bet they get that much from procurement opportunities alone), and the implied FCF generation embedded in their 2019 leverage target (slide 15 from the deck) is massive.
2017 PF synergized Ebitda $154m less $10m capex less $31m interest expenses = $113m FCF. That's a 40+% yield on the current market cap! And that FCF number doesn't contemplate any further asset sales, revenue synergies, additional cost synergies, or market growth (all of which are very likely).
This deal and the price move should put this stock on the screens of a lot of new investors going forward and I think the market will wake up to all this over the next several days. But for now, crazy...
|Subject||Re: Re: Re: BLDR/ProBuild redux / more simple math|
|Entry||03/12/2018 02:42 PM|
These guys are going to be cash taxpayers. The NOL is subject to usage limitations, except to the extent they are used to offset gains on the RE portfolio.
I think you should be tax-adjusting your FCF.
Still cheap, but I think a 40% FCF yield may be on the aggressive side.
|Subject||Re: Re: Re: Re: BLDR/ProBuild redux / more simple math|
|Entry||03/12/2018 02:52 PM|
ok that's fair, takes the yield down to (only!) low-mid 30s%. one of those upside levers (asset sales, incremental synergies, etc.) hits and your yield goes right back up. point is this thing is super cheap even after today.
thanks for the write-up.
|Subject||Re: competitor comments|
|Entry||03/12/2018 08:41 PM|
Why would a company sell at a price that was this accretive?
|Subject||Re: Re: competitor comments|
|Entry||03/13/2018 07:44 AM|
I think the idea is 7x (pre synergy price) is fully valued in the space, but BXC can extract more synergies than anyone else. Still leaves the question open as to why sellers didnt ask for some stock back in sale process
|Subject||Re: Re: competitor comments|
|Entry||03/13/2018 07:50 AM|
A lot of the accretion is due to integration + cost saves. Standalone EBITDA for Cedar Creek was $60mm trailing, for a purchase price of 7x. This is a full price for a distributor. BlueLinx plans on taking $50mm of costs out w/in 18 mos, yielding a sub 4x EV:EBITDA multiple. So Cedar Creek sellers capture a "full" price while BlueLinx gets to take home the cost savings. These cost savings simply wouldn't have been available to Cedar Creek as a standalone. This is a scale business.
From a financial standpoint, the massive accretion is due to the fact that the acqn is 100% debt-financed. This obviously raises financial risk as the PF entity goes back to 4x levered, but if you are a believer in the housing cycle (as I am) then you don't mind being in a financially + operationally levered entity for the next few years b/c those elements will work in your favor. If you are a bear on housing, then this definitely isn't for you.
Possible open question is why wouldn't Cedar Creek PE sponsors build entity further through M&A and get benefit of cost savings. Not sure yet, but my guess is the clock was ticking on the holding period and they don't have another 3-4 years to use this as a platform. BXC mgmt was a bit cagey on the call about the sale process.
I will post addl detail if/when I get it.
|Subject||Re: Re: Re: competitor comments|
|Entry||03/13/2018 07:56 AM|
Ships passing in the night...saw ahnuld's comment after I posted.
I would speculate the reason Charlesbank (seller) didn't take stock back is because they want/need liquidity in whatever entity held Cedar Creek. It was purchased in 2010 so coming up on 8 year holding period.
Personally, I wouldn't overestimate the selling acumen of PE firms. Lets not forget that Cerberus blew out half the company at <$10/shr. Talk about short-sighted.
|Subject||Re: Re: Re: Re: Re: competitor comments|
|Entry||03/13/2018 10:01 AM|
We did some calls as well. Mainly with customers. Agreed with the assessment that there's a lot of overlap and synergies. Said in some markets CC was better in other BXC, but given wholesale focus and overalaps it'd be easy for them to cut a lot of costs and probably be more efficient for customers given many use both for different purposes. Didn't see it as a risky proposition for BXC.
Not sure who owned this thing at $15 and is selling at $30. It's better way better at $50 now, than it was even at $15. Bigger, safer, company, and the synergies are very real and probably conservative. Using a conservative base case we have them north of $10 in cash earnings next year.
|Subject||Re: Devils Advocate|
|Entry||03/13/2018 12:51 PM|
Sure. There are risks such as the ones you mention. If one is concerned about macro/interest rates/etc. can be easily hedged by shortinig hbp/bldr, maybe others such as amwd. Also would point out that double from here (or more) is based on 0% organic growth (unlike the example you gave with bldr) and synergies of only 1.5% (20% less than suggested by BLDR). Also not sure if at the time there was clear communication from bldr that the $110M could be significantly exceeed, but that is the case here. One look at the maps of the footprints of the two companies in this merger make it clear why this seems very doable.
|Subject||Re: Devils Advocate|
|Entry||03/13/2018 02:01 PM|
Agree with all your points. I did attempt to highlight in my comments that if you are a bear on housing, you do not want to be anywhere near BXC given the combination of financial + operational leverage.
The current management team has exceeded on most metrics to-date since taking over, which gives me some comfort on the integration front. However, they will have a lot on their plate and success is not a given.
|Subject||Re: Re: Devils Advocate|
|Entry||03/13/2018 05:33 PM|
Spoke with mgmt earlier today. Thought I would pass along a few thoughts.
Re the 4m swing from ebitda on the 110M SLB transactions, mgmt commented they had been overly conservative in their prior estimation, and of the 8M they had treated as 50/50 interest/depreciation, it would be more like 80/20 interest/depreciation so more like a 1.8M deduction from ebitda.
On the NOLs, after the 110M SLBs, there are still ~70M remaining. They can be used for both continuing operations and RE with some restrictions. For RE, the Cerberus transaction triggered a change of control and started a 5 year clock for their use, so they have about 4.5 years left to use them on RE. They can also use them for continuing ops for 20 years with a clock that started two years but can't use more than 5M / year. So their preference is to use them for RE sales.
This is important particularly in the context of who owns what RE, CC or BXC. Mgmt suggests most CC facilities are leased while most of BXC's are clearly owned. While there's a lot to figure out in terms of how they'll want to configure their footprint once the companies are operating as one company, this suggests a likelihood they will consider many of their properties for an outright sale and simply use CC facilities where suitable. Additionally mgmt confirmed their <3x 19YE leverage target was derived solely from FCF and operational improvements, suggesting faster progress to this goal is possible.
|Subject||Re: Re: Re: Devils Advocate|
|Entry||03/13/2018 06:02 PM|
Thanks! Did they also provide info on whether the $68M in new leasebacks would be on similar terms - a 9% cap rate? Glad to hear they can use NOLs for ops (to a point) and especially that this means if they sell the remaining $160M worth of real estate, those would be real gains that they can use to pay off the new $180M high cost debt they just took on, rather than just really a refinancing as the first SLB seems to have been. That's great news.
Any sense as to whether they will get this story out via roadshow or otherwise any time soon, such as after deal closes. They also could use some sell-side coverage....
|Subject||CFO open market purchase yesterday|
|Entry||03/14/2018 06:04 AM|
Roughly $30k. Not a huge amount, but interesting nonetheless on a stock that has doubled in short order.
|Subject||Re: Re: Re: Re: Devils Advocate|
|Entry||03/14/2018 11:22 AM|
I appreciate the risk analysis, but I want to push back a bit because there seems to be a conflating of the three different types of debt: capital leases, WC facility, and "regular" debt. These three types of debts have different terms and covenants and different rates.
The way they discussed the Cedar acquisition was actually a bit odd because they did not distinguish how much working capital (inventory) was coming with the purchase. They threw everything into the $345mm number. But they then laid out the $580mm of pro forma total debt (not including capital leases) and the $180mm of term loan (i.e. "regular" debt). And this implies $400mm of ABL working capital, which makes sense.
But this does not take into account the $150-160mm of real estate they can still sale-leaseback. I'd like to see them de-risk the structure and do these deals and eliminate the term loan by end of Q2.
The pro forma cap structure (if they did $150mm sale-leaseback) by end of Q2 here would be:
$400mm of ABL
$68+$110+150 = $328mm of capital leases
no other debt
This would require about $50mm of annual interest. Add to that about $10mm of minimal capex. $60mm of EBITDA required to operate business. That is a fair amount of cushion even if synergies fall short and lumber prices fall.
The ABL naturally scales with the business and so is much less vulnerable to a downturn as well. And one synergy not captured in their EBITDA synergy number is the reduction of working capital due to overlap.
I think their leverage is real, and we have sold some of our position because too large for a risky position, but in the low-30s, this is a very cheap SFH play after taking into account the leverage.
|Subject||Here's why BXC is less risky now|
|Entry||03/14/2018 02:36 PM|
Here's why BXC is actually less risky now: The combined company (with no synergies and no growth and no real estate sale or sales leasebacks) is trading at 7.3x debt/ebitda now versus 7.6x debt/ebitda before the deal and before the deal they really did not have an opportunity to SELL their real estate and they did not have a huge synergy opportunity in front of them. They have both those opportunities now. Keep in mind that before the deal, they really only could do SLBs with their RE, just another way or refinancing their debt. Now, they can SELL RE to reduce debt. So at today's price, you get BXC at a slightly lower leverage and slightly better FCF post-deal than before deal AND can unlock RE value more easily AND have huge oportunity to realize $50M+ in synergies.
So, today you are buying the old BXC at slightly better debt coverage and slightly higher FCF yield and get the huge cost synergy opp and RE flexibility for free.
Here's the math:
|Subject||Re: Here's why BXC is less risky now|
|Entry||03/14/2018 02:52 PM|
I would not agree less risky at moment because they took $180mm of equity in the combined structure and replaced it with debt. But I agree with your other sentiments.
- also, they could have sold some of their real estate because they had quite a significant part that was not being used. I had hoped they would sell their real estate for ballpark $250mm and then lease back only $200mm of it. But that has not happened. But yes, due to geographic overlap, they can now sell even more real restate.
So there are two synergies not in the $50mm EBITDA synergies. They can reduce inventory and they can sell real estate (or unwind leases). I'd like to think they can reduce inventory and ABL by >$50mm and reduce real estate by > $50mm. This should cut interest by $7-10mm.
|Subject||Re: Re: Here's why BXC is less risky now|
|Entry||03/14/2018 05:56 PM|
previously at $15 it was a highly leveraged smaller player trading at 7x earnings and probably cheap given how quickly they're growing. now at $34 they're a scaled major market player in all markets, and will do nearly $10 in cash earnings run rate by 2019. leverage is going down. they're not taking synergies on human capital, so integration risk is low and are trading at 3x run rate earnings.
this risk/reward profile is objectively better than it was at $15. i'm surprised to see that this is generating a debate. i guess that's what makes a market and enables people to buy at $34.
|Subject||More insider purchases|
|Entry||03/15/2018 05:08 PM|
More insider purchases last couple of days:
VP, Chief Admin Officer = $31k
VP, Logistics = $91k
Director (Dinapoli) = $80-85k
Chairman/Director (Fennebresque) = >$1mm
The last one is obviously material. Quite a bit of buying in aggregate.
|Subject||Re: More insider purchases|
|Entry||03/16/2018 08:35 AM|
General question, is there a way to know w these insider buys if they are subsidized by company? I think a few of the corporations I worked for the corp picked up 10% or something of stock purchases - not sure if there was a cap on size of purchase...
|Subject||Re: Re: More insider purchases|
|Entry||03/16/2018 09:25 AM|
Coincidentally had a previously scheduled call w/mgmt this morning. Asked about the purchases. None of them are subsidized, 100% out of pocket for the employees and/or BOD members.
|Entry||05/03/2018 07:36 AM|
They look good.
Margins up across the board. Sales up. Aggressive commentary around immediate accretion, cash flows and synergies.
|Subject||Re: Re: Earnings|
|Entry||05/03/2018 02:28 PM|
Trading sloppy for sure, though not entirely unexpected given the recent price move and lack of analyst coverage. Just spoke with mgmt a little while ago, and I heard nothing that pokes holes in the thesis. Couple thoughts on potential bogeymen or investor misinterpretations:
|Subject||Re: Re: Re: Earnings|
|Entry||05/07/2018 01:30 AM|
I am wodnering if you got any detail on why gross margins were down sequentially? This (and the related issue of, if one assumes inflation, unit volume would be down YoY) seemed the only other concern aside from the less-than-ideal answer about an equuity raise (which you have since clarified).
|Subject||Re: Re: Re: Re: Earnings|
|Entry||05/07/2018 09:41 AM|
Magins holding this quarter means that they were up. The company is effectively short lumber in that its customer contracts reset more slowly than the product they buy (e.g., if you're selling on a 60 day fixed contract but buying at spot and lumber rises then you get pinched). The CEO alluded to this on the conference call.
They also had 30 down days this quarter, which I believe may have been a record high. I haven't dug into all the components of gross margin, but it'd be logical to me that some of the costs associated with those closures/openings could've been allocated to product.
|Subject||Small insider purchase|
|Entry||05/25/2018 05:59 PM|