Installed Building Products (IBP), which made its IPO debut in February 2014, is trading at new all time highs these days and it has made a huge move in the past month since reporting strong Q4 results. Since the name is not well known and it's a fairly slow news day, we wanted to use this opportunity to provide some color on IBP.
Since you're probably not familiar, a little background would help. IBP is the nation's second largest insulation installer for the residential new construction market. IBP provides installation of insulation in all areas of a structure, including 1) Building Envelope where the company insulates the exterior walls of both residential and commercial structures by applying insulation on the wall or between the studs; 2) Attic, which is where the most energy is lost in a home; 3) Basement and Crawl Space which are spaces that typically account for the second most energy loss in a structure; and 4) Acoustical as many builders want acoustical insulation for sound reduction.
About 78% of revenue comes from insulation installation, but IBP is also a major installer of complementary building products, including garage doors, rain gutters, shower doors, closet shelving and mirrors. Most of IBP's business comes from new single family home construction (70+% of revenue) with the remaining coming from Commercial (12%), Repair/Remodel (9%) and New Multi-Family (6%).
Roll-Up Strategy: IBP has been very active on the M&A front, as it uses what is known as a "roll-up" strategy. The installation business is highly fragmented. It's mostly small, local businesses -- a lot of mom-and-pop shops and small family businesses. IBP saw an opportunity where it could come in and acquire smaller installers all around the US. Probably the biggest benefit is that this greater scale also has allowed IBP to negotiate better prices from insulation vendors (IBP goes direct to national manufacturers, skipping middlemen). In fact, in 2016, acquisitions added $97 mln to annual revenue.
It's worth noting that in October 2016, IBP announced its largest acquisition ever when it announced a deal to buy Alpha Insulation and Waterproofing (deal closed in January 2017). Alpha is based in Atlanta and focuses on commercial customers with a network of eight branch locations located in the Southeast. Alpha's products include waterproofing, insulation, fireproofing, and fire stopping. Alpha services large, long-lead time commercial projects including office buildings, airports, sports complexes, museums, hospitals, hotels, etc. Alpha's recent jobs include work on high profile projects such as the Atlanta Braves SunTrust Park and Dallas/Fort Worth Intl Airport. With annual revenue around $90 mln, the deal significantly increases IBP's commercial exposure (most of IBP's current sales are residential).
The stock jumped in late February on a particularly strong Q4 report. Non-GAAP EPS rose 29% YoY to $0.44 vs $0.34 in the prior year period. The $0.44 result was ahead of market expectations. Revenue rose 22.2% year/year to $234 mln, which was also above market expectations. On a same branch comps basis, revenue improved +10.6%, with approximately 52% of the increase coming from growth in the number of completed jobs, and the remainder achieved through price gains and more favorable customer and product mix. Adjusted EBITDA margin in Q4 grew to 12.7%, from 12.3% in the prior year quarter. For the full year 2016, revenue rose 30.2% YoY to $863 mln. On a same branch basis, revenue improved +15.6% from the prior year.
IBP's growth is being driven by a nationwide presence in many of the country's strongest housing markets. Looking ahead, while not providing specific guidance, IBP says 2017 is off to a great start. Also, Alpha is an accretive acquisition that allows IBP to quickly expand and diversify into the commercial end-market. Commercial sales represented approximately 12% of IBP's 2016 revenue but that should increase quite a bit in 2017. IBP said its residential and commercial markets are showing continued signs of expansion and the company is optimistic these trends will remain throughout 2017.
Increasing interest rates are a potential headwind going forward, however, IBP is a name to watch on two fronts: 1) it's using an M&A roll-up strategy to consolidate a very fragmented industry made up of mostly small family businesses. There are some real benefits here in terms of cutting out middle men and leveraging its scale to negotiate better prices with insulation manufacturers. And 2) the improving new home construction market.