With it being a slow news day on this day after Thanksgiving, we thought this would be a good opportunity to take a look at Installed Building Products (IBP), which is trading near new 52-week highs and has made a very strong move since reporting Q3 results in early November. IBP has had its ups and down since making its IPO debut in February 2014, but the stock has keeps moving higher over the long term.
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 (yes it's a tongue twister) in all areas of a structure, including
- 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;
- Attic, which is where the most energy is lost in a home;
- Basement and Crawl Space which are spaces that typically account for the second most energy loss in a structure; and
- 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 one of IBP's bigger deals. In January 2017, IBP closed on its largest acquisition ever when it bought Alpha Insulation and Waterproofing. Alpha is based in Atlanta and focuses on commercial customers. 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. With annual revenue around $90 mln, the deal significantly increases IBP's commercial exposure (most of IBP's current sales are residential).
In terms of that Q3 report in early November, non-GAAP EPS of $0.57 was actually below expectations although revenue rose 31.0% year/year to $295.2 mln. The downside EPS result was mostly the result of Hurricanes Harvey and Irma, which impacted sales in several Texas and Florida markets. They had to close locations and the storms had effects on public infrastructure and on its customers' jobsites.
The hurricanes reduced IBP's productivity and there were the direct costs of paying employees while its locations were closed. There were also costs associated with preparing for and cleaning up the damage caused by the hurricanes.
With that said, IBP was upbeat looking forward to Q4 and 2018, mostly due to the continued strength within the US housing market. Also, IBP continues to attract compelling acquisition opportunities. Just since June 2017, IBP has acquired five insulation companies representing a combined $20 mln of annual revenue.
In sum, we think 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.