TopBuild (BLD), which is an installer and distributor of insulation and building materials to the US construction industry, is trading sharply higher today on a very strong Q1 report.
Non-GAAP EPS jumped 45% yr/yr to $1.06, much exceeding market expectations. Revenue rose 26.0% yr/yr to $619.3 mln, which also was much better than had been expected. BLD also raised guidance for the full year: revenue expectations were increased to $2.61-2.67 bln from $2.57-2.635 bln, and EBITDA guidance was increased to $330-350 mln from $310-330 mln.
BLD operates in two segments: its Installation segment (TruTeam), which accounts for roughly 67% sales, and its Distribution segment, Service Partners, accounting for the other 33%. About 72% of TruTeam's revenue comes from insulation installation, but BLD is also a major installer of complementary building products, including rain gutters, windows, garage doors, and shower enclosures.
As such, residential construction trends are going to have a big impact on TopBuild's results, so the recent improvement in that sector has acted as a nice tailwind for BLD in Q1. During this morning's post-earnings conference call, CEO Jerry Volas said that while "affordability continues to be an issue, it has been improving over the past few months." The Fed putting the brakes on rate increases for much of 2019 is causing mortgage rates to pull back. Volas went on to note that builders are also getting a bit of a break due to pricing for lumber, a major cost component, moving considerably lower than previous levels and thus helping in quests to control pricing.
Another important part of BLD's story is that it has been very active on the M&A front, deploying what is known as a "roll-up" strategy. The installation industry is highly fragmented. It's mostly characterized by small, local businesses -- a lot of mom-and-pop shops and small family businesses. BLD saw an opportunity to come in and acquire smaller installers all around the US, providing the company the benefit of greater scale, which has allowed BLD to negotiate better prices from insulation vendors.
TopBuild's M&A activity is mostly found on the TruTeam side of the business, and it had a big impact on Q1 sales growth. The TruTeam segment saw revenue grow 36.4% yr/yr; 26% of that was from M&A. That tells us that BLD remains very active in terms of buying smaller, family-owned insulation installers.
Overall, this was a good start to 2019 for TopBuild. The outlook is clearly more positive than it was when mortgage rates were rising and the stock market was falling in 4Q18. The stock has rebounded nicely since December, going from around $42 to near $80 currently. It will be important for mortgage rates and new construction activity to continue to move in TopBuild's favor for the balance of 2019 to keep the stock moving higher.