To Boldly Go Where No Man (person?) Has Gone Before - The Building Products Industry
I really want to examine an industry where I have very little advanced knowledge. I kind of knew which utilities and restaurants I would like before I started, because I have watched those stocks for 40 years.
I wanted to start from scratch and look at industry where I have few “preconceived notions”
I am a lifetime renter, so I had never paid much attention to the building products industry. I was handed the research coverage list of a regional broker and found they covered 10 building products stocks. I am sure there are more, but let’s start with just 10.
Of course, if you are a “macro guy” you might object to wasting your time looking at building products stocks just as residential real estate is crashing. Or you might make the argument that as a contrarian, this is exactly the best time to be looking at building products.
I will start with Masco - MAS - $50 - as “king of the hill”. All I know is that a value investor I respect has MAS as his 2nd largest position, and has held it for many years. He does not own many cyclicals, so what does he see is MAS?
Let’s find out. I realize I need a separate post on how to conduct these “one hour analysis” projects. Here is what learned:
MAS’s stock has under-performed for the last 1,3, and 5 years, but has been OK for 10 years, because the stock was crushed after the 2008 financial crisis.
The stock is selling for a modest 13x, with 2% yield. Price/book cannot be calculated because they have bought so much stock back, but EV/sales is 1.6x
I could not find a decent SA report, but I did find a good report on Morningstar report. The MS piece gave a great history of the company, and pointed out two key divestitures. Understanding the company history is so important, here new management came in in 2014.
75% of the business is bathroom plumbing fixtures, most of this business is remodel not new construction. 25% of the business is Behr paint which seems to have a unique relationship with Home Depot. There is an opportunity to sell more paint in the contractor market. The business is relatively “low ticket” and might survive a recession.
These guys have bought a lot of stock back. They have basically completed 1/3 of a LBO in the last 10 years. They talk a great “capital allocation” game.
Interest coverage is a very sweet 13x
My guys at Fiduciary Management own 2.5%, and Bill Nygren owns 2% (I am not really a Nygren fan, but he helps a little). I wish maybe one more sharp value guy owned the stock. Both the CEO and CFO own over $10 million dollars each, so they should be focused on doing well.
Wall Street has 9 buys, 11 holds, and 2 sells. I would call this about average expectations, and wish there were a few less buy recommendations
This company lost money for 5 straight years 2008-12. You have to make the case it is a different company today.
The last quarter was a slight miss. It will be interesting to see 2023 guidance when they report next quarter.
Overall MAS is a decent idea, but I might like it better under $40, with say a 15x a $5.00/share 2027 estimate, or a $75 target. Maybe there is more to the paint story than I realize. Or maybe this is still an ugly cyclical that will lose money at the bottom of this cycle. Tough call.
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What the hell is The AZEK Company - AZEK - $22 ?
There are not many $3 billion dollar companies that I have never heard of, but this is one. Let’s learn together:
The stock came public in 2020, at $30, went quickly to $50, and has crashed to $20. That is great, I am very interested. Busted IPO’s can be fun.
They are in the residential deck building business using composite (not wood). This seems a little “high ticket”, I am a little less interested.
They seem to be kind of an ESG play because the composite is from recycled material so it is more eco-friendly than wood decking. At best this is mild negative, and could be worse.
Only one decent growth stock manager, Wasatch, owns 2%, and the CEO does own a million shares.
I really tried to get a feel for the company before I looked at valuation, but at a EV/sales ratio of 3x, I am losing interest quickly.
interest coverage is only 7x for such a young company
I could not figure out who the prior owners were. I smell private equity, which is a final huge negative. If the company were selling at 50% of sales, I would dig harder, but now I am just giving up.
Let’s reevaluate at $10.
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New shooter.
Masonite International - DOOR - $85
Masonite was a revolutionary composite in the 1940’s and 50’s, but not so much any more. These guys went bankrupt in the last cycle, all that is left is a door business.
the stock has underperformed for 1,3,5, and 10 years, which of course for me is a positive
at 9x and 1.0 EV/sales, the valuation is interesting
interest coverage is a decent 8x, but this could be peak earnings
the business is over 50% remodel, but there is still a tie to new construction
management does not own much stock, and no good value guy is an owner
I cannot find a quick thesis, they make 40,000 doors a day and have only one competitor, maybe I am missing something.
I will pass for now.
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Next player
American Woodmark - AMWD - $52
Is is the #3 maker of cabinets in the US, mainly in the lower end of the market. Market cap is about $1 billion
the stock has badly underperformed the last 3, 5 and 10 years
the stock sells for 7x, and 1x book, and 60% of sales
the business is more tied to new construction
The balance sheet is ok
only one analyst is positive, and 5 rate it hold/sell
the company has not been buying back stock
no sharp value guys own the stock
This is a crucial company to examine, and then think about. It is almost the statistically perfect value stock. Maybe 20 years ago this might have been a stock I was attracted to, but now I am more than a little hesitant. Today I need more of an interesting upside story. I am not really looking for a “catalyst”, but I do need some type of positive change occurring. Just being cheap is not good enough.
I would rather “pay up” for Masco, maybe this is wrong. Maybe boring is good. This is another stock that might haunt me. Normally private equity would have bought this company already, but it is just too cyclical to leverage up.
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AMWK cabinets made me think of a cabinet company named Aristokraft where I did an internal audit for the old Beatrice Foods in 1981. I spent five hellish weeks in Jasper, Indiana back then. So I googled Aristokraft, and look what I found:
Masterbrands - MBC - $7.7
This is a brand new spinoff of Fortune Brands, that just became public in December of 2022. It includes Aristokraft which Fortune Brands had acquired from Beatrice in the late 1980’s. I love spinoffs, and 40 years ago I stood in the Aristokraft’s CEO’s office talking Indiana basketball. I know the German immigrants of southern Indiana are master craftsmen with wood, but can they make any money doing it.
Spinoffs are a great source of value ideas. They often get dumped by their new owners. That could certainly be the case here. The only problem is Fortune Brands also piled about $1 billion in debt on the new company. It is in the form of a JP Morgan term loan with rather nasty interest rates and covenants.
I want to believe. Maybe the spinoff was done just to test me. This is a stock that should go instantly to my model portfolio, but I am just a giant chicken.
I still have 5 more building products stocks to look at, but this post is getting too long.