Imperial Industries has been in operation for decades, manufacturing and distributing building materials in the Florida panhandle and the broader Gulf Coast area. It (barely) survived piratical 1980s management and a decade-and-a-half swim in oxygen-poor OTC backwaters, arriving via a March 2005 reverse split on the NASDAQ at precisely the right (wrong) time. It attracted the attention of stock promoter Bernie Schaeffer around the time it attained its proper listing and quickly built a share base of excitable retail investors looking for hurricane plays. An appearance on the IBD 100 list followed, causing shares to be bid up to nearly $30. It’s been sold ruthlessly since then as hurricanes stubbornly refused to lay waste to New Orleans for a second time and concerns over housing persisted. Meanwhile, the company has restructured some (shedding one of two manufacturing businesses) and opened additional distribution centers. Failing a buyout of some sort, my belief is that they will realize slightly better margins on fairly higher volume as they continue to grow, with the story turning from one of a failed momentum trade to one of an under-followed grower.

Some numbers:

 

                                                                                                 

Having sold off its Acrocrete acrylic stucco business to Degussa Wall Systems in the summer of 2005, the company now operates two divisions, Premix-Marbletite Manufacturing (which makes pool finishes, ceiling tile mortar and other products) and Just-Rite (a building materials distributor/ drywall shop originally begun to distribute Acrocrete product). The company annoyingly does not break out segment detail in its reports (there are a number of potentially useful stats/metrics missing from their filings), so there’s an amount of guess work in going through the numbers. On a TTM basis, it seems the Premix/Just-Rite split is 22/78 on revenue and 30/70 on EBIT. Given the split, this write-up will focus on Just-Rite.

 

 

The SG&A line should improve a bit going forward, given the disposal of the Acrocrete, the sales-service demands of the new Just-Rite locations over the past year, and the current inclusion of charges related to a one-time computer upgrade. Still, there are a lot of fixed costs here. To illustrate, quarter-over-quarter sales for Q3 were down 14% (Q2 is traditionally a very strong quarter). Over the same period ROIC (defined here as taxed operating income over net working capital plus PP&E) plunged by more than 18% to 12.2%. Since getting rid of Acrocrete, ROICs have averaged over 25%.

 

Though it has decelerated YTD, IPII has grown revenues by a respectable average 13% per year over the past several years. On a 9-month run-rate, they’ve grown 7%. The distribution business in which they operate is still very fragmented. For some good discussion on this and secular housing trends in IPII’s home market, see sam12’s great treatment of BLDR. There is plenty of reason to believe that they can sustain growth rates through continued opening of Just-Rites and consolidation – if they are not themselves consolidated, a distinct possibility discussed below.

 

The question then is what is a growing (though cyclical) company with respectable returns on capital worth? There are a few ways to think about it. If we look at comps, one of the more logical is HBP. It is an inferior company on many measures yet it trades at almost 6x EV/EBITDA versus IPII’s 4.6x.

 

We could steal coda516’s neat little model for starters. Last quarter’s ROIC (below historical ROICs across the cycle, though the Acrocrete disposal clouds things) was 12%. I think the 7% trailing 9-month growth rate is safe, and a we can assume a WACC of 11% (a guess on the high side – IPII does a poor job  specifying the interest on its debt, giving a range of applicable mortgage debts but not the dollar amounts attached to each rate). With those inputs, a fair EV/EBIT of just over 7x results. Compare that with a current EV/EBIT of 5.46x.

 

There has been substantial M&A interest in building products in general of late. 9x trailing EV/EBITDAs are not unheard of. This implies more than a double at current prices. While I don’t think a company this small and humble would garner such a multiple, I do have reason to suspect it may be the subject of interest to a strategic buyer. USG has been snapping up similar outfits over the course of the past year, buying the Livonia Group of drywall shops at the start of the year and All Interiors of Miami in October. In addition, if you look at the footprint of Eagle Materials new Georgetown, South Carolina plant, you’ll see its Southern part overlaps quite nicely with IPII’s network of Just-Rites. Such buyers could reduce the crushing SG&A burden greatly. More of a pie-in-the-sky thought, if Cemex’s interest in Rinker is ever consummated, it’s tough to see Cemex having much use for Rinker’s drywall and acoustics business. IPII would be a nice bolt-on to whoever wound up buying them.