|Shares Out. (in M):||89||P/E||n/a||0|
|Market Cap (in $M):||48||P/FCF||0||0|
|Net Debt (in $M):||462||EBIT||14||0|
Bluelinx is an overlooked and unloved distributor of lumber and building materials to customers serving the US homebuilding and repair and remodel industries. Potential investors see thin margins, a heavy debt load and a high mix of products susceptible to volatile commodity price swings and move on to their next investment candidate. They should take a closer look.
A more thorough examination reveals a market leading company well-versed in managing lumber price volatility and low margins with quick turns and an efficient logistics network. An old mark on the company's real estate portfolio obfuscates a company that is trading at a fraction of its liquidation value. Over the years, its debt structure and associated real estate holdings have been both a blessing and a curse. Its distribution center ("DC") network has been a valued source of collateral and in some cases a source of funds to lean against during the depression-like conditions in the housing market over much of the last decade; at the same time, this network and the 10 year CMBS umbrella mortgage loan that binds it has served as a deterrent to migrating operations to a more cost-effective and higher margin business mix. The December 2015 expiration of the $1M / month prepayment penalty on the CMBS mortgage due June 2016 changes all this. Investors should look past the ugly surface level financials and dig in.
BXC corporate history presents a fascinating case study and is critical to understanding the company's current situation and future prospects. Bluelinx operations began as the captive distribution arm for Georgia Pacific (“GP”). Its network of 48 DCs was built to suit the needs of the parent company lumber manufacturing operations where many DCs were oversized and attached to vast lumber yards so that GP could run their lumber mills flat out and stow excess lumber at the adjacent yards. In 2004, a struggling GP began a massive restructuring effort which led to the sale of its distribution assets to Cerberus in a tax-free transaction that preserved the old real estate valuation on the company's books. BXC then went public with Cerberus offering up just under half of the company in an IPO in December 2004. The company had a mortgage on its DCs and an asset backed revolver in place for its working capital needs. In 2006, Cerberus increased and refinanced the mortgage to the 10 year CMBS umbrella mortgage that is still in place today. The company trudged forward into a wobbling housing market. And then the bottom fell out of it.
Since then the company has been eeking its way through a tough market in hopes to survive long enough to see a brighter day. It's certainly been bumpy. There's been a revolving door in the C-suite, a Cerberus freeze-out attempt in 2010 (at levels well in excess of today's market cap) that was subsequently negated by existing shareholders, two PIPEs that have diluted shareholders, an ill-fated and poorly timed speculative inventory position in 2013 and a few DCs sold off along the way for cash to keep the company afloat. But survive it has, and the company now looks poised to once again go on the offensive into a housing market that has recovered and begun marching slowly but steadily upward. The company’s survival can be seen as a validation of a few important factors: its durable distribution business model, its valued real estate, a PE oriented owner that wants to see its investment succeed and a counter cyclical working capital cycle which allowed the company to delay any value destructive measures until the company was a full six years into the worst housing downturn since the Great Depression.
With the important high level history mostly out of the way, we'll skip the rest of the company and industry struggles over the last decade and move on for a quick discussion of the business model and further assessment of current operations and strategy. However, prior to our projections, we will offer a timeline of key events as an efficient way to highlight a few elements of the story important to the investment thesis. Generally these comments will focus on key events, people changes and noteworthy shareholder actions.
2 Step Distribution and Bluelinx
Pro-dealer Builders Firstsource recently defined the pro-dealer, lumber and building materials product distribution market as approximately $100B in size. Precise and timely data for the market for two step distribution is more difficult to locate, but prior estimates and market share claims from Bluelinx put the current figure likely at or above the $20B level. Bluelinx, the largest independent two step distributor, competes with the captive distribution arms of Boise Cascade, Weyerhouser, Universal Forest Products, independent publicly traded peer Huttig Building Products and hundreds of small mom and pop distributors, most of whom do less than $200-300M in sales and make up the remaining 60-70% of the industry.
The building materials products supply chain remains a highly fragmented space, with two steppers similarly serving a still heavily fragmented base of lumberyard and pro-dealer customers. Accordingly, Bluelinx distributes over 10,000 SKUs from 750 suppliers to approximately 11,500 customers with minimal customer and supplier concentration. Bluelinx wins by providing a reliable, efficient and cost effective delivery platform to fulfill its customers’ order requests consistently, on time and in full. Its efficient, IT enabled logistics platform allows the company to order large, break bulk and deliver smaller quantities to customers who cannot source products effectively direct from their larger manufacturing supplier partners. Its cost plus pricing model makes it less susceptible to commodities than manufacturers while its industry leading scale creates buying power it can leverage by passing better pricing along to its customers.
Success in this business comes from a dependable delivery offering, scale, quick turns and efficient working capital management. According to conversations with industry participants, well run two steppers are capable of sustainable mid-cycle ebitda margins in the 3-6% range, depending on product mix. Right-sized inventories and fast turns (8x or more on the whole but faster for the commodity oriented Structural category) mitigate lumber price volatility. Minimal capex needs allow the business model to generate a return sufficient to cover the cost of capital and generate excess free cash flow. While it’s just a glimpse, before the housing market rolled over, we can see BXC paid out more in dividends than it required for capex. Competitor HBP has been discussed here a couple of times (once in 2000 and more recently in 2014), and prior posts are a good place to look for further insight into the business and the business model’s cash generation potential in a more normal housing environment.
Bluelinx Pre-housing Downturn and Now
As of 10/3/15 for the last twelve months, BXC did $1.9B in sales and $31M in ebitda, for a 1.6% ebitda margin. This is down from the $4B - $5B top line figures and 2%+ ebitda margins the company did in the years prior to the housing bust. Then, as now, these sales are highly correlated with the growth in new residential construction for single-family homes. Repair and remodel, multi-family and some industrial (which includes things like manufactured housing and furniture manufacturing) comprise the rest. Before the housing downturn, the company’s product mix was skewed heavily to Structural products, at greater than 60% of sales. Structural products include things like lumber, OSB and plywood. The higher margin Specialty products bucket includes things like molding, engineered wood products and insulation. The warehouse delivery channel was generally responsible for a little more than half its mix, with approximately a third of sales going through the lower margin direct channel. This is generally not the preferred mix split given the greater weight of lower margin products that are more susceptible to commodity price swings. But, it’s not altogether very surprising, given the configuration of the company’s operating platform and the tendency for captive distributors to place more focus on volume at the expense of profitability. Even so, with an efficient back end and quick turns the company became adept at navigating an operating environment that is very different from the one we know today as evidenced by their solid free cash flow generation.
Mitch Blake joined the company as CEO in 2/2014. Since then the company has been pursuing a more decentralized and cost efficient operating structure. Previously, the company had held a top-down centralized structure where sales calls were made by inside sales reps in either of the Atlanta or Dallas offices. Over the last year, the company removed a reporting layer and pushed VPs into the region where they could be more in touch with the day to day needs of the local markets. Additionally, the company has implemented a contribution margin based selling tool that gives sales reps the ability to factor in both gross margin and cost to serve into their profit equation which enables them to focus their efforts on sales that are better for the company bottom line. This is a better approach towards targeting the many different localized markets the company is serving, as it empowers employees to make the right decision for that market in a timelier manner. It is a more cost-effective way to run the business, and the greater accountability and responsibility over time is also likely to attract a higher quality sales rep. Technology allows the company to marry a market facing customer approach with company-wide coordinated scale in procuring materials. LEAN initiatives have also been implemented as the company pursues a culture of iterative cost-outs. Despite this cost focus, with minimal capex needs, the company has also managed to invest in itself during these difficult years, by enhancing its IT offering and adding more fuel efficient trucks to its fleet of 800 tractors.
This is absolutely the right way to run a distribution business. Distribution businesses should be run with a focus on costs, efficiency, local market relationships and iterative rather than step-change oriented improvement in company operations. Progress is being made, though you have to look closely at the financials to see it this year, given the negative impact a large decline in lumber prices has had on this year’s results.
The recently reported Q3 offers a good look at the company’s performance in a tough lumber price environment. The company reported topline down -6% in total with commodity deflation contributing to three-fourths of the decline. According to the Random Length’s Composite Index, lumber price deflation for the quarter averaged about -15%. The company managed to offset this decline in part by turning inventories around 8x with ebitda coming in -6% versus 3Q14. That’s certainly not ideal, but given the lumber deflation for the quarter looks to be the worst year over year quarterly comparison since the ‘06 - ‘08 period, it should be a positive indicator that the company was still able to put up $11M of ebitda at a 2.1% ebitda margin. The timeline further below highlights some recent developments in more depth, but lower costs and better margins are beginning to show up in the company’s income statement, despite the still low industry volumes.
Taking a bigger picture view of the company in its current form, we see it has made good progress on the long held company goal of flipping their mix to a greater weight of Specialty products, which is now running near 60% of the mix. The company has also moved the warehouse channel, where they earn the highest margin and have the stickiest customer relationships, to an all-time high level of 73% of sales. This improved mix and lower cost structure look to be significant contributors to the respectable margin levels the company has achieved at these lower volumes. It stands to reason further progress can be made on a real estate footprint that is likely oversized and inefficient from a cost perspective relative to their preferred business mix. As the company moves forward into a housing market operating at higher volume levels, it should benefit from improved mix, lower costs and a real estate footprint that is more congruent with a SKU mix comprised of higher value-added products. Given the dramatic difference in mix from peer Huttig, these factors provide a path to considerable upside for the company.
Bluelinx has two pieces of debt. It has an ABL for working capital which borrows against its inventory and accounts receivable and the aforementioned 10 year CMBS umbrella mortgage. The ABL is a $468M facility due 4/17. It calls for a $35M payment by 5/16 which is not to come from operations, which means it’s most likely slated to come from its mortgage refinancing. This $468M figure also includes a $20M Tranche A loan due 6/16. There is a small loan around $10M to a Canadian subsidiary on similar terms, due 8/18. The company pays near a 4% rate on both. There is a fixed charge coverage ratio covenant on the ABL, but it is superseded by a stipulation that requires the company to have excess liquidity of greater than $33M. At October 3rd, BXC had total borrowings of $284M and excess liquidity of $64M.
The mortgage, secured by the owned DCs, is due 6/16, carries a rate of 6.35% and contains a $1M / month prepayment penalty. Additionally, it has a cash sweep feature so any property sales bypass the company and go immediately to service the principal, an event that happened on prior sales. Per management, the company has never missed or been late on a payment; some eyebrows were raised when the company appeared in the special servicing category of the CMBS mortgage pool, but it was strictly as a result of the property sales. The recent Eastdil analysis shows the properties are valued somewhere in the neighborhood of the $332 – 352M range. At October 3rd, the balance due was $169M. Over the life of the loan the company has now accrued around $173M of equity which provides it some flexibility.
Given the terms of the mortgage, the company hasn’t had much incentive to move forward on any asset sales. But that should change as the calendar flips to 2016. As discussed previously, BXC has a volume-oriented DC network. There are many oversized warehouses on large property sites at railheads in big metropolitan areas in what has become valuable industrial property. You can see this on Google Maps (or building square footage stats in the S1) where for example the Lawrenceville, GA site looks quite a bit larger than many of its other DCs (as well as its peers which also tend to have smaller DCs). Also in the S1 is an interesting comment where the company states it could increase capacity by 50% with minimal investment. This implies an oversized footprint, particularly if the company is targeting a higher mix of Specialty products. So it seems the door is now opening for the company to pursue a product mix and footprint that are more in tune with another.
- 5/2004: Cerberus buys distribution assets from GP in management-led buyout valued at $824M.
- 12/2004: Just under half of BXC shares come public under an IPO.
- 6/2006: Current 10 year CMBS put in place.
- 3/2008: Stephen Macadam resigns as CEO.
- 3/2008 to 10/2008: Howard Cohen serves as interim CEO.
- 10/2008: George Judd, former BXC COO and GP vet, hired as CEO.
- 8/2010: Cerberus freeze out attempt initiated at $3.40, subsequently upped to $4.00. On the then 44M fully diluted share count, the $4 offer implied a market cap of $176M. Adding the 6/30 net debt figure of $429M, we get a TEV offer of $605M. This for a company with $4.3M of LTM ebitda in a housing market that would do 586k single family (“SF”) starts. The offer was subsequently blocked by remaining shareholders as 90% of shares were required to be tendered. There are some very interesting filings from this period including the Cerberus offering document filed August 2nd and a 13D filed on August 18th stating the case to block the merger. In a letter to the Board, the shareholder states net asset value (after accounting for the appraised value of the real estate) is more than 2.6x the original $3.40/share offer (or >$389M). It also refers to February 2010 management projections for $4.4B of sales and $170M ebitda in 2014 when the housing market returns to 1.3M starts. Obviously, we’re yet to see these numbers. But it’s also quite easy to see that the chief culprit is the housing starts assumptions, which proved overly optimistic, as many others of that time did. We also don’t know exactly what assumptions underlie those projections. It’s reasonable to assume it did not include the current low proportion of SF starts to total starts or a lumber price at the $300 level. Specialty / Structural product mix and warehouse / direct delivery mix are also unknown inputs. Even so, these projections and sales and ebitda levels in the 04/05 time period make for useful data points as we try to forecast what this company can do when housing starts do indeed return to more normal levels.
- 7/2011: Cerberus leads PIPE for 18M shares at $2.10 for $37M of capital raised.
- 3/2013: Cerberus leads PIPE for 23M shares at $1.75 for $40M of capital raised.
- 4/2013: CEO George Judd resigns. Howard Cohen serves as interim Executive Chairman during CEO search.
- 2Q 2013: Ill-fated and poorly timed oversized inventory position contributes to disastrous 2Q results. This quarter highlights the sometimes ugly performance that results from speculative inventory positions or the pursuit of an improper operating strategy.
- 5/2013: BXC strengthens board presence with two well-regarded additions. Roy Haley, former Chairman and CEO of Wesco International becomes Chairmen and Kim Fennebresque, former CEO of investment bank Dahlman & Rose, join the board. Both deepen the independent side of the bench with Haley bringing considerable distribution operations experience and Fennebresque bringing sound strategic and financial counsel to the company.
- 1/2014: Mitch Lewis joins as CEO. His prior role was as CEO with Euramax, another building materials products turnaround effort. Early BXC initiatives include a focus on streamlining its inventory position and pushing a more decentralized and cost-efficient operational model.
- 5/2014: Susan O’Ferrell appointed CFO. She joins after a 15 year career with Home Depot and leaves as former VP of Finance with particular focus on At Home Services group.
- 1Q 2015: BXC reports second ebitda positive first quarter in seasonally difficult Q1 (after 2014 Q1) in the last eight years. This report points to good success on cost cutting initiatives and their ability to be profitable at a low volume levels.
- 6/2015: SVP Sales position eliminated. This move further enables the path forward to a more decentralized operating structure.
- 2Q/2015: BXC reports ebitda of $10M. The company reports topline sales down -3%, hurt by a -7% decline in commodity pricing and a -3% hit from a lost contract to a big box retailer. Notably the contract loss in the direct shipment category was from the lowest margin business segment and least sticky delivery channel. Structural volumes were +1% and specialty volumes were -1%. BXC reports further progress on decentralization initiative with its VPs now reporting directly to the CEO. Positively, the warehousing segment, the highest margin and stickiest business is now 73% of sales, the highest in company history.
- 7/2015: NYSE standards listing notice issued on July 31st after shares fall under $1. The company states listing criteria will be met either through improving financial results or if necessary, by a reverse stock split. Note standard protocol would indicate the reverse split would come after approval from shareholders at the company’s shareholder meeting, expected to be held in May.
- 8/2015: Board member Ron Kolka leaves. The move appears to be related to recent Cerberus / Remington related actions.
- 10/15: BXC issues 8-K on October 2nd to respond to unusual trading activity. Bluelinx states it’s unaware of a fundamental reason for sell-off and states it hired Eastdil Secured to assist with its mortgage and associated real estate portfolio actions.
- 3Q/2015: The updated appraisal per Eastdil indicates property valuations in the $332 – 352M range, in line with the 6/06 appraisal which the company had previously relied upon.
Scenario Analysis and Return Outcomes
Handicapping potential outcomes here isn't a terribly precise exercise. We simply don't know just yet what actions the company will take when 2016 rolls around and the company has the operational flexibility it has lacked for the last ten years. Given the company has hired Eastdil Securities to assist it with its RE portfolio and has also commissioned an updated appraisal for the property valuations, it's reasonable to believe some level of asset repositioning is likely. And with the market cap of $60M and asset values of $600M (or ~$851 after adjusting for the value of the DCs) resting at such a wide disparity, it seems sales here should be value creating. Given the complexity in estimating the impact to the company's financials stemming from the unknown level of asset sales and pursued path forward, let's triangulate around a couple of possible paths forward. For the downside case, we’ll assume housing starts don’t roll over and use NAV and a theoretical liquidation value as a starting point. For the base case, we’ll assume no property sales and the company pursues the path forward that looks most like the company’s historical operations. And for the upside case, we’ll assume the company has some success in evolving their operations to a higher margin mix.
Downside case: The real estate adjusted book value calculation yields a value of $2.44. Depending on the haircuts put on the inventories (85%), receivables (90%) and machinery (75%), a liquidation analysis cuts that figure in half, to $1.24. The traditional liquidation haircuts are probably a little penal in this case given the PE ownership would likely imply stability through a sale. Even so, we’ll use the liquidation analysis as our downside case. This of course is absent a macro shock or housing downturn. But even in the event housing starts did roll over, it seems the company’s real estate and working capital would again provide a cushion to enable the company to survive through another down cycle, provided of course it doesn’t last another six years as the last one did. Downside case = $1.24.
Base case: With most of 2015 in the books, we’ll use it as a jumping off point for future projections. We will use 10% growth as a SF starts forecast and we’ll basically hold the mix and cost structure relatively constant with what we’ve seen so far in 2015. We’ll assume no asset sales, minimal improvement in working capital and a steady product mix across the Structural and Specialty categories. We’ll then compare this to some of the ebitda margins proffered in the old management team’s projections. While we don’t know what mix or real estate assumptions the old projections incorporated, they should prove a useful point of comparison. For our TEV calculation, we’ll assume some minimal debt paydown from these levels as without a change in mix, the company’s improvements in the working capital position are unlikely to be very dramatic. With 10% SF starts growth to 2019, we arrive at a market building 950k+ SF houses a year and a company doing a 3.0% ebitda margin on $2.6B. Our buildup doesn’t land too far afield from the prior projections, where we believe the major reason for the shortcoming is the lack of housing starts and the skew towards multi-family. For the sake of comparisons, the prior projections called for a 3.4% ebitda margin in FY13, when they expected to be running at a clip of 1.2M total starts, a number that likely implies a similar level of SF starts given that many expected SF to continue to contribute the ~85% of starts to total starts it historically had. At 7x FY18’s $78M ebitda, we have a TEV of $550M. Assuming the company ends FY18 with net debt of $355M versus the $429M at FYE 14, we arrive at a valuation in the low $2s. Not bad for a three year return on assumptions that feel conservative.
Upside case: We’ll use the same macro assumptions we’ve used in the base case, with SF starts growth at 10%. Given we don’t know what level of asset sales the company is likely to pursue, we’ll assume none for simplicity. This will omit the improvement to the company’s balance sheet through its real estate sales and associated inventory run off. This will also not capture the impact of any potentially reduced sales as a result of a smaller footprint, which is a possibility. However, in attempt to highlight some of the benefit achievable from a better mix, we will give the company credit for these moves by growing their Specialty mix to 75% of GP from 70% and give them a lower working capital requirement. We’ll assume the company can move from its 15%’ish level as a percent of sales to 10%, still a far cry from HBP’s consistent 8%’ish levels. Commensurate with the working capital improvement, we’ll accelerate the debt paydown given the minimal capex needs and the $2B of NOLs that will minimize the tax bill going forward. In the upside case on the same macro assumptions, we’ve now got a company doing $100M of ebitda on $2.5B in sales. Aside from the obvious benefit the higher margin product lines carry for the company’s profitability levels, the lower working capital requirement can facilitate a faster paydown in debt, creating an impact on the equity valuation that could be quite dramatic. Should the company be able to move towards a working capital level near 10% of sales, it could pay down $200M of debt by FYE18. Putting a 7x multiple on FY18 ebitda and a net debt position of around $225M would yield a share price in the low $5s. And that’s a return that would be quite exciting.
Questions remain in determining the most likely outcome. Even so, with valuation at such a seeming disconnect from company asset values and company end markets moving in the right direction, it seems well worth the risk to buy now and stick around to find out how this plays out.
- Housing starts: The company needs a growing market to generate the returns discussed in the base or upside case. The pace of starts growth and the composition, single family versus multi-family, are a consideration as well given the company has relatively little exposure to the multi-family market.
- Management execution: The company isn’t quite out of the turnaround stage yet and there’s a lot of heavy lifting to do to right-size the footprint and more profitably grow sales. Still, early signs of progress, obscured by intense lumber price deflation this year, point to competent management pursuing the right strategy.
- Lumber prices: Per the 10K, a 10% down move typically costs BXC in ~$6M of GP in the Structural business. Commodity prices are of course very hard to predict, so we’ll spare everyone the in-depth analysis. But generally the idea is to buy low and sell high. With lumber prices recently rebounding from under $300 earlier this year, a level that over the last 20 years has generally proved to be an excellent entry point, there looks to be more upside than downside here.
- Industry consolidation: There has been some recent high profile consolidation amongst the company’s pro-dealer customer base. At some level of scale, they may look to take these operations in house. But even after two recent deals, the end market is quite fragmented.
- Controlled company: BXC’s PE owner doesn’t look to have always made the right moves, highlighted by the 2013 inventory position. But since then they have made good strides in the operations starting by placing solid distribution experience at the board level. They have also supported the company with capital infusions when necessary. At some point down the line, possible secondaries will present an overhang on the stock. But at these levels and given the overall position as a positive caretaker Cerberus has assumed, it seems very unlikely.
|B/S @ 10/3/2015||Adjusted Value||Haircut||Salvage Value||Note|
|Total Current Assets||482.6||482.6||81%||392.2|
|Land||41.1||342.0||107.1||100%||107.1||Assumes midpoint of appraisal value attributable to land and buildings only|
|Machinery & equipment||77.3||14.6||75%||11.0||Assumes 60% of accumulated depreciation goes to machinery and haircut on liquidation|
|Construction in progress||1.2||1.2||0%||0.0|
|PPE, at cost||209.8|
|Current maturities of LTD||203.0||203.0||203.0|
|Total Current Liabilities||342.6||342.6||342.6|
|Long Term Debt||247.9||247.9||247.9|
|per share on 89M CSO||-$0.40||$2.44||$1.24|
|BASE CASE - Model Excerpts|
|Total Housing Starts||783,800||928,300||1,006,000||1,108,612||1,219,473||1,341,421||1,475,563|
|SF Housing Starts||540,000||620,000||650,000||715,650||787,215||865,937||952,530|
|GP - Structural||64,800||69,000||69,000||61,710||71,318||80,340||88,374|
|GP - Specialty||137,300||155,000||156,000||157,032||174,034||192,866||213,724|
|adj % sales||0.3%||0.1%||1.2%||0.0%||2.2%||2.6%||3.0%|
|UPSIDE CASE - Model Excerpts|
|Total Housing Starts||783,800||928,300||1,006,000||1,108,612||1,219,473||1,341,421||1,475,563|
|SF Housing Starts||540,000||620,000||650,000||715,650||787,215||865,937||952,530|
|GP - Structural||64,800||69,000||69,000||61,710||68,076||73,203||76,863|
|GP - Specialty||137,300||155,000||156,000||157,032||178,520||199,282||222,410|
|adj % sales||0.3%||0.1%||1.2%||0.0%||2.3%||3.2%||4.0%|
- Reverse stock split: In response to the NYSE listing notice, the company has stated in the absence of improved results leading to compliance with a share price over $1, it is likely to do a reverse stock split to come into compliance. Protocol suggests this would be approved at the annual shareholder meeting, expected to be held this coming May. Either action would dramatically improve the marketability of the stock as many shy away from stocks at these levels. Greater marketability would also improve liquidity, attracting further investors.
- DC sales: Sales of certain DCs would give the company a nice cash infusion, both from the asset but the working capital as well. This would lead to immediate improvement in the company’s balance sheet and likely attract further investor interest.
- Debt paydown: Whether through DC sales or organic cash from operations accelerated by the $2B NOL position, a balance sheet that looks more “normal” to most investors will attract much more interest while also accruing value to the equity holders.
- Lumber prices: These are clearly cited as a risk factor as they should be. However, even a return to last year’s average price could add $10-15M to the company’s GP line.
- M&A: The company is obviously out of the game as an acquirer at the moment, but its $2B NOL position presents a strategic asset that can be used effectively in the M&A game. The NOLs make BXC more attractive as a takeout or merger candidate.
Disclaimers: The views expressed herein are for informational purposes only, and are not intended to be, and should not be, relied upon as an investment recommendation in connection with any investment decision for any purpose. The author makes no representation as to the accuracy or correctness of the information contained herein. The information and the views contained herein are provided as of the date this summary was posted and present the views of an investment firm that currently holds a long position in the company’s securities. The author has no obligation to update any of the information provided herein. The author reserves the right to decide to purchase, sell, or engage in any other transactions involving the company’s securities as it deems appropriate based on a number of factors. These factors may include its ongoing evaluation of the company’s financial condition, business prospects, conditions of the stock market, general economic and industry conditions and other relevant factors. Past performance is neither indicative nor a guarantee of future results.
|Subject||Re: Great idea - probably even better today - thoughts on refi?|
|Entry||08/25/2016 10:26 AM|
Banjo - Apologies for the delay on replying, but I haven't been paying a ton of attention to the board on this one as it hasn't gotten a whole lot of attention (probably b/c of its microcap status) so thanks for the comment. I think it's clear we're on the same page here both on current dynamics as well as the potential future share price.
As for the refi, I spoke to a number of people who all seemed confident a deal would get done given their belief there was real value in the real estate. Obviously terms were a bit of a wild card, so getting the deal done, with those terms and a 6.4% rate and mandatory deleverging has to be considered a positive.
Looking forward, I agree with your intermediate term price target, based simply on company specific initiatives. Mgmt endorsed something along the lines of $38-48M in ebitda for FY16 based on their seasonality comments after accounting for a minimal loss from property sales that have already been identified (1H 20M ebitda @ 40-50% seasonality - 2M ebitda run rate from closures). Between the pending DC sales and some inventory rationalizations, it wouldn't shock me to see something under $340M in net debt by Q1. So then the company would look dramatically differenet from a leverage perspective than it has at any time in the recent past with more juice in the tank on further deleveraging.
Beyond that, much of future gains will be about single family starts. I'm pretty confident we'll see a good deal more starts in the future, but predicting the pace of growth is always tough. That said, it seems all the incoming data seems to support a housing shortage thesis, so they should get a long term tailwind from that.
Another point worth mentioning is that lumber prices finally look to be going their way. All the chatter I hear on the US/CAN SLA negotiations point to a struggle to get a deal done. The exact outcome is unclear, but ending only the second out of the last 30 years of free lumber trade with Canada this coming fall has to be a positive for domestic lumber prices.
I second your comments on mgmt. I've been equally impressed in my conversations with them and it is all about ROIC and local market touch/expertise with them (which I think is the correct approach and critically important).
All in all, I thought it was a good idea then, but it's probably an even better one now. Still a lot of upside, and most of the truly hairy items (refi, stock split) have been dealt with or are soon to be in the rear view mirror.
Thanks for sharing your thoughts. This one's been kind of lonely, but I guess that's a good sign.
|Subject||Re: Re: Re: Picking up the thread|
|Entry||05/09/2017 01:10 PM|
Good points Banjo. Curious to hear your take on 1Q. I initially thought the 2.1% same-center topline was a pretty big disappointment vs SF starts +6 and some expectation for a couple points worth of price contribution. On a closer look I do give them a benefit of the doubt given the regional weather headwinds and generally tough comparison for the Q from last year.
Here's Beacon's sales performance by market for their 2Q ending 3/31:
Not a 1:1 comparison granted, but if you can't get on a roof, you're not starting homes either. Given BXC is overweight the NE and MA, I think their same-center 2.1% growth is probably about market.
It also looks like their might be some actual valuation support coming for shares in fairly short order. Projecting the business in the near term is a bit tough given all the moving pieces, but here's a quick back of the envelope look. Take the $35M same center ebitda from FY16, deduct $2M from the run-rate for closed DCs, and give them credit for 20% ebitda growth versus the 23% in Q1 and you get 40M in ebitda for FY17, which feels like it could be pretty low. Use 9M for D/A, 20M for Int Exp, 0 for taxes (there'll probably be some state taxes, but 0 for simplicity) and 9M for the share count, and you get ~$1.20 in earnings for FY17. Granted this ignores the balance sheet ( which is improving) but a HSD PE multiple just looks too low, especially if housing starts keep growing into '18 and beyond.
Nice to see liquidity improving too. Looking forward to seeing new filings as they come out...
|Subject||Re: Re: Re: Re: Re: Picking up the thread|
|Entry||09/05/2017 04:29 PM|
Agree on both accounts. A near term sale seems unlikely and I think it's a short term question mark for shares as it's tough to handicap the process of how the shares get moved. On the plus side, this team has never been out to tell the story to my knowledge, so any activity on the investor relations front should be good. It's also arguably coming at a pretty good time as the balance sheet and earnings profile of this company should show considerable improvement over the next couple quarters. Seems it shouldn't be too hard to attract $50M+ of buyer interest at these levels with positive catalysts and EPS inflection on the horizon. I would also expect mgmt to show well as they've always seemed sharp to me. The negative would obviously be that shares could go at a discount if Cerberus decides they're not going to be too price sensitive. Even so, I'd expect that would likely be fairly short lived.
And yes, the reality of the situation is they, and most building products companies, should benefit from the rebuild in Houston.
|Subject||Re: Re: Re: Re: Re: Re: Re: Picking up the thread|
|Entry||09/15/2017 09:17 AM|
Interesting tidbit on the management hint. Makes sense. Also, it was nice to get confirmation that all their DCs etc were spared by the storm and are fully operational.
|Subject||Re: Re: Re: Re: Re: Re: Re: Re: Re: Re: Picking up the thread|
|Entry||10/17/2017 10:37 AM|
Zipper - Thanks for the helpful updates. All of that foots with everything I've learned from mgmt in my discussions with them. They have continued to state that Cerberus became very hands off after they got comfortable with Mitch's leadership. Very understandable given the 14 year investment horizon and the fact it's a tiny little hanger on from their fund.
I thought the prelim numbers looked great. Midpoint of NI calls for a $.50 3Q. Seasonality aside (which I think places 2Q as most important with 3Q slightly behind it), not bad for a $9 stock.
There are a whole lot of things that look to be going their way, and if they are truly going to begin an IR effort in earnest, it's hard to imagine there won't be a lot of interest at these levels.
|Entry||10/17/2017 04:54 PM|
Do you know if any insiders have made a commitment to participate in the offering and by what magnitude? If not, what do you think of current alignment? Thanks on advance.
|Subject||Section 382 and NOLs|
|Entry||10/19/2017 10:19 AM|
Everyone's favorite topic: What happens to NOLs here? Does this trigger a Section 382 CoC? Any explanation would be appreciated.
Is the reason they are doing a secondary to avoid triggering a Section 382 CoC?
|Subject||Re: Section 382 and NOLs|
|Entry||10/19/2017 11:11 AM|
I see that Cerberus sold less than their full position. Intentionally to avoid triggering CoC. But now Cerberus still has small position worth several million dollars that they cannot sell for 3 years, right?
I am not familiar with the nitty-gritty of PE, but what then did Cerberus achieve other than selling position at a steep discount?
|Subject||Re: Re: Re: Section 382 and NOLs|
|Entry||10/19/2017 02:08 PM|
I am also no tax expert, but I do not understand your answer. I do not understand notion about CoC of debt versus the equity. Why is debt relevant here at all? I did not read prospectus the same way either. I read the prospectus (below) to indicate that they sold less than all shares precisely to avoid triggering CoC. Help me understand your perspective.
"If the Selling Stockholder sells all the shares being offered by this prospectus then an ownership change limitation will be triggered. Because we have had other 5-percent shareholders, sales of less than all of the shares being offered could also trigger the limitation. The exact percentage cannot be determined until an actual sale occurs as this fixes the date of the three year look back period. Likewise, sales of less than all shares being offered could accelerate future ownership changes as a result of subsequent changes in our stock ownership, even if they do not immediately cause an ownership change. If an ownership change within the meaning of IRC Section 382 occurs, it could restrict our ability to use our NOL carryforwards. Limitations on our ability to use NOL carryforwards to offset future taxable income, including gains on sales of real estate, could require us to pay U.S. federal income taxes earlier than would be required if such limitations were not in effect. Similar rules and limitations may apply for state income tax purposes."
|Subject||Re: Re: Re: Re: Re: Section 382 and NOLs|
|Entry||10/23/2017 12:55 PM|
Good insight here into the NOLs and this comports with my understanding entering the transaction per mgmt. The short of it is, the NOLs would be preserved for use in offsetting all real estate gains for the next five years. As for net income, the expectation was some NOLs would remain eligible for use, and some would be eliminated due to the change of control. It sounded as if the amount was a moving target depending in some ways on the transaction and future income though the belief was there would still be signficant savings for the next two to five years.
|Entry||10/23/2017 01:43 PM|
The final prospectus language certainly supports your argument. The shrs sold by Cerberus (including greenshoe) are a hair less than 50% of current 9.1mm shrs outstanding, but the shrs sold by other 5% holders in past 3 years must have pushed them over the 50% mark.
I remain confused as to why Cerberus would not sell a few less shrs so as to not trigger CoC. Or on the flipside, if they were going to trigger CoC, why not sell every share.
I remain confused on your debt explanation. The new facility has no problem with Cerberus selling their shares and even includes language for this contingency. Does the mortgage debt have some trigger if Cerberus sells all their stake or gives up board seats? Assuming use of greenshoe, they will own only 3% of outstanding shrs.
The original VIC writeup by UncleM said that there were $2bn of NOLs, but I believe this is an error. I see $200mm of NOLs. And these NOLs can still be used for built-in gains as they sell the real estate. So the effect of CoC was less than I had been led to believe. I still think it is a mistake to not retain flexibility to use NOLs for both ops and real estate sales. Perhaps the good news is that it puts pressure on mgmt to sell real estate sooner.
|Subject||Re: Re: Re: Re: Re: Re: Section 382 and NOLs|
|Entry||10/23/2017 01:59 PM|
your original report state $2bn of NOLs, but I cannot find that number or anything close in past 3 10-K's. Did you mean $200mm in NOLs rather than $2bn?
|Subject||Re: Re: Re: NOLs|
|Entry||10/24/2017 11:31 PM|
any idea why it's stubbornly hanging out at $8? it seemed like it had a decent base and was chugging north of $10 before the deal.
i assume it's still flow back from the block that traded, but wondering if there's something else i'm missing.
|Subject||Re: Re: Re: NOLs|
|Entry||10/25/2017 01:04 PM|
You have gone above and beyond on the NOLs and Section 382. Your detail squares with my reading of Section 382. Thank you.
|Subject||Re: Re: Re: Re: NOLs|
|Entry||10/25/2017 02:32 PM|
Agreed straw. And to answer your question below, that looks like a clear error in the original write-up. Much better to use the current numbers of $169M gross federal. Apologies.
|Subject||Re: Insiders buying, stock very attractive|
|Entry||11/15/2017 12:53 PM|
Good thoughts Banjo. Agree that it's nice to see the insiders step in with a cluster buy and I read the impact to near term real estate monetization similarly. Even so, I don't think some leaseback announcements will be too far off as it sounded like they would have this next tranche done by the end of Q1 per their recent EPS call.
I would also add they will be presenting at a buyside conference in New York tomorrow, which is nice confirmation they will indeed be proactive in their ongoing IR efforts.
|Subject||A dumb question|
|Entry||11/15/2017 07:22 PM|
What real estate do they actually own? And is it real estate you want to own in the long term? Thanks.
|Subject||Re: Re: A dumb question|
|Entry||11/16/2017 10:00 AM|
gocanucks - I would look at the slides they just posted, which will hopefully answer your question. Page 7 highlights the working capital, which I would expect to show some modest rolloff due to seasonality into Q4.
isaambres - They own all of their real estate, and their appraisal values and sale prices have held quite closely together over their sales to date. Generally speaking, a lot of these yards are large, near rail heads in industrial parks and are quite valuable, particularly given the movement in industrial property values. I think some pieces they'd like to keep for the long term, but some are not optimal given changing land values / footprint needs over the years. Until now they've been hamstrung on their ability to make any desired changes or realize any of this value in these properties.
|Subject||Recently announced SLB|
|Entry||01/11/2018 10:41 AM|
Thoughts on the recent announcement of the SLB?
Looks very positive and ahead of schedule, surprised the stock isn't trading higher.
I am definitely a buyer here, am I missing something?
|Subject||Re: Re: Recently announced SLB|
|Entry||01/11/2018 12:44 PM|
I was planning on reposting...lot of good things have happened. Pretty well have a writeup ready to go, but wanted to wait a few more days until my annual requirement date turns over. I think Jan 22.
|Subject||Remaining real estate and valuation?|
|Entry||01/11/2018 07:48 PM|
One other thought / question is that they sold only 4 DCs for proceeds of $100MM leaving BXC owning 33 remaining properties. Does anyone have a sense if these were some of the better properties in the portfolio and if so, how does it foot with the 2015 net Eastdil valuation of $265-$285MM (~$330-350MM real estate valuation (less the 13 sites sold last year for $67MM). I guess that leaves $165-175MM of value for the remaining 33 properties ($5MM per site at the midpoint)? I guess that does foot with the sales of the 13 sites sold last year.... Just thinking if they can sell down another 100MM and get 100bps of margin expansion (+$18MM) as they have said, then we could be looking at $40-45MM of EBITDA (net of adjustments) and ~3x TD / EBITDA. At an 8x EV / EBITDA valuation, I am coming up with mid-20s stock price. Don't want to get ahead of myself, just wanted to throw it out there for thoughts?
|Subject||Re: Re: Re: A dumb question|
|Entry||01/15/2018 04:28 PM|
Got another one for anybody who can chime in. In the writeup, it is said that "Its efficient, IT enabled logistics platform allows the company to order large, break bulk and deliver smaller quantities to customers who cannot source products effectively direct from their larger manufacturing supplier partners." I'm likely missing something as I'm not too familiar with this space, but why do large dealers like Builder's FirstSource and BMC (BXC customers) need to go through this 2 step distribution process? Are BLDR and BMCH just more focused on the value-add services and providing some additional manufacturing? I know there has been some consolidation among the dealers and am wondering how this affects distributors (if at all).
Also, why are Huttig's gross margins so much higher at just over 20% compared to 12% for Bluelinx? I am assuming it has to do with product mix?
Thanks for the original write-up and commentary here in the messages
|Subject||Re: Re: Re: Re: A dumb question|
|Entry||01/17/2018 02:50 PM|
Interesting approach with the four sale leasebacks which I like a lot. Glad to see more restricted shares going out and hoping to see more alignment with total share price when the proxy comes out.
The major difference in GMs is due to mix. HBP has a higher value added component - they prehang doors for example - while BXC is more about simply moving stuff. The good news is this margin gap presents a pretty healthy opportunity.
As to BMC and BFS, in the prior housing cycle they did use BXC and the two step channel. Since then, they've gotten bigger and for the most part, have been able to source directly from the manufacturers. They still on occasion go through the two step channel, but fairly seldomly and BXC does not have a great deal of business with either of them currently, particularly relative to their mix years ago.