Drywall Demand Boosts Continental Building Products

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Whether it's called drywall, sheetrock or wallboard, new buildings need lots of it.

These gypsum-based panels are the most common building blocks used for interior walls and ceilings.

And now that the housing market is rebounding -- storms and other obstacles aside -- demand for the material is on the upswing.


Home remodeling and commercial construction also show budding signs of life, adding to the good news for the half-dozen or so U.S. wallboard manufacturers.

Among them is a fairly new name in wallboard,Continental Building Products ( CBPX ).

But Continental is no stranger to sheetrock. Its assets had long been part of the North American wallboard division of France-based multinational cement and concrete giant Lafarge.

As part of ongoing asset sales, Lafarge sold the gypsum assets to private equity fund Lone Star for $700 million. The deal closed August 30.

Lone Star took Continental public Feb. 5, retaining more than 70% of the outstanding shares. The stock is up 24% from an IPO price of $14, though 16% off its March 10 high.

Reston, Va.-based Continental makes wallboard from synthetic gypsum as opposed to natural gypsum, a mineral that has become scarce in the U.S., and virtually non-existent in the eastern U.S.

Synthetic gypsum makes use of a by-product of coal-fired power plants. Quality is considered equally as good as the mined mineral.

Markets For Materials

Continental sells wallboard to distributors, buying groups, wholesalers, mass merchants and other retailers, mostly in the Eastern U.S. and Canada.Lowe's ( LOW ) is its top customer, accounting for 15% of sales, according to RBC Capital Markets.

Continental says it has 17% market share east of the Mississippi.

USG ( USG ) and National Gypsum have the largest share. Other rivals are the more diversified Georgia-Pacific andEagle Materials ( EXP ).

Continental is a pure-play in wallboard, one of the top-three players in several markets.

Its assets had been well-cared for by Lafarge, which spent more than $500 million to modernize plants, mainly wallboard operations in Silver Grove, Ky., Palatka, Fla., and Buchanan, N.Y. Those investments plus cost-control measures in the downturn made them among the most efficient and low-cost in the industry, observers say.

Because of those investments, "capital needs are low," said analyst John Kasprzak of BB&T Capital Markets. And as the housing market continues to recover, he added, Continental should generate "meaningful free cash flow."

"There is still substantial improvement to come just to get back to long-term historical averages for housing production" Kasprzak said.

RBC Capital Markets forecasts housing starts will rise from 927,000 in 2013 to 1.2 million in 2016. In the last few years they had fallen as low as 554,000, in 2009.

Meanwhile, drywall-needy commercial construction is starting to pick up. In a company filing, Continental said the sector should grow at a compound annual rate of 17% from 2013 to 2016.

Commercial wallboard is thicker than residential wallboard, so it "soaks up capacity faster," raising plant utilization rates, Kasprzak says. The commercial type also commands higher prices.

Remodeling Revs A Bit

The repair and remodeling market also shows "signs of life," Kasprzak said. "But it has only just started. Most repair and remodeling spending come within two years of a house changing hands."

Existing-home sales fell slightly in February from January and 7% from a year earlier to a seasonally adjusted annual rate of 4.6 million units as severe winter weather disrupted activity.

National Association of Realtors chief economist Lawrence Yun expects gains in the months ahead.

The National Association of Home Builders' Remodeling Market Index notched a relatively strong level of 57 in the fourth quarter, same as the third quarter, the highest reading since the first quarter of 2004. An index score above 50 shows that more remodelers report market activity is higher than lower, based on current projects and future indicators.

RBC Capital Markets expects Continental's wallboard volumes to rise 10% a year through 2016. Deutsche Bank analysts think the firm will realize an 8.5% price increase in 2014, 5% in 2015 and 6% in 2016. Price rises should taper off, the analysts wrote, "given that prices were up 27% in 2012 and 17% in 2013."

Volume and prices fell off especially hard between 2008 and 2011, amid the economic downturn and sluggish construction after the housing market crash.

Growth Outlook

In Continental's latest reported quarter, the fourth quarter of 2013, adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) more than doubled from a year earlier to $29.8 million. Net income rose 125% to $6.7 million, or 21 cents per share.

"The company's cost structure is such that over 50% of incremental revenue flows through to EBITDA," Deutsche Bank analyst Nishu Sood said in a March research note.

Overall sales in the quarter grew 30% to $114.4 million. Volume was up 18% to 632 million square feet and net prices up 14% to $143 per thousand square feet. Net income for the full year rose to $4.9 million compared with a net loss of $68.7 million in 2012 on a pro-forma basis, Continental reported.

In the financial release put out on March 27, CEO Ike Preston said the firm was well positioned to "leverage existing capacity and low-cost production" to realize added profits and cash generation "over time."

Preston previously was Lafarge's co-president and president of the gypsum division.

Continental said in the release that weather conditions in the Eastern U.S. would adversely impact wallboard volume in the first quarter. Even so, it expects net sales and adjusted operating cash flow to increase in 2014, though it didn't say by how much.

Company executives declined to comment further for this article.

In a poll by Thomson Reuters, analysts expect a 17-cent-per-share loss in the first quarter but 69 cents in profit for the full year. Earnings next year are expected to rise 107% to $1.43 a share. Analysts expect revenue to climb 17% in 2014 to $469 million and 16% in 2015.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: CBPX , LOW , USG , EXP

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