Installed Building Products Helps Homebuilders Build

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Installed Building Products is a cog in the homebuilding food chain.

The company, a February IPO, doesn't design or make anything. Like a subcontractor, and as its name implies, IBP installs products for builders.

About 80% of it is insulation. The rest is a hodgepodge of products for new homes -- shower doors, closet shelving, garage doors, rain gutters.

Hundreds of homebuilders call onIBP ( IBP ) to install it all. They range from large, publicly traded builders such asLennar ( LEN ),D.R. Horton ( DHI ) andPulteGroup ( PHM ) to small, local builders who put up only a home or two a year.

As new-home starts have picked up from the bottom, albeit at a slower and more uneven pace than in past recoveries, builders have more reason to call on IBP. The Columbus, Ohio-based company provides services in 44 states from more than 100 warehouses.

"We're riding along with the general uptick in the housing market," said CEO Jeff Edwards in a recent interview with IBD.

Roughly 80% of IBP's revenue is directly tied to new residential construction in the U.S. The rest comes from repairs and remodels of existing homes and some commercial business.

Citing various industry sources, IBP estimates that housing starts in the U.S. will grow an average 19% annually from 2013 to 2015.

Installer Stock

Since IBP's initial public offering, which raised a net $79.8 million, IBP has presented investors another way to invest in the homebuilding cycle, analysts say.

With 100% of the company's sales coming from installation services to builders, IBP is "nearly a pure play" in the U.S. housing-start cycle for investors who are not interested in asset-intensive builders, said analyst Kenneth Zener of KeyBanc Capital Markets, in a research report.

IBP buys insulation from four major suppliers. Its largest supplier isOwens Corning ( OC ). The others are Knauf, CertainTeed and Guardian Fiberglass. Since it buys in bulk, IBP secures lower prices than smaller installers.

IBP offers investors "a focused way to invest in the housing recovery with M&A (mergers and acquisition) upside," Zener noted.

The company has acquired over 90 companies since the late 1990s. It has picked up only one so far this year. But Edwards says to expect more buys this year.

IBP's market share has gone from 5% in 2005 to 16% in 2013. It's the second-largest installer of insulation, behind the insulation division ofMasco (MAS), which has roughly a 30% share. Masco also manufactures insulation.

"The market share IBP has achieved amid difficult conditions is notable," wrote Zener.

The company endured a tough few years during the housing downturn, but revenue and profit bounced back last year.

Revenue in 2013 jumped 43% to $431.9 million. Net income from continuing operations rose to $6.6 million vs. a net loss of $4.3 million in 2012. On a per-share basis, the company earned 2 cents in 2013 vs. a 49-cent loss in 2012.

Winter Chill

Like many other companies in the construction business, IBP's first-quarter results will likely be impacted by delays due to severe winter weather in many of its markets, the company warned.

Analysts expect IBP to post a loss of 1 cent per share in Q1 but forecast a profit of 57 cents a share for the full year, up from the slight 2 cents last year. They see 2015 earnings rising 111% to $1.20 a share.

Same-branch revenue in 2013 was up 29.6%, exceeding the 17.7% uptick in U.S. housing completions during 2013, Edwards noted in the company's fourth-quarter earnings release in March.

He cited the firm's "market-leading positions in the most attractive U.S. housing markets."

Like the housing market itself, "business is primarily won or lost at the local level," the company likes to say. Installers and sales personnel work from local warehouse branches.

Edwards says that business is best in markets with good job growth and new-home starts. "Both the West and South are strong. We're definitely busy in the South," he said in the interview.

Expansion Strategy

IBP aims to be number one or number two in each of its markets. But the company has little or no presence in some key areas, such as the Southwest.

"We're not in Nevada or Arizona at all," Edwards said.

So those areas would be ripe for acquisitions, he says, in addition to "tuck-in" buys in markets that the company now serves. Zener notes that 35% of IBP's sales are in its original Midwest region, followed by the Southeast at 33% and 16% each in the Northeast and West.

Many of the acquired companies still go by their original trade names -- Edwards/Mooney & Moses, Suburban Insulation and GTG, to name a few.

IBP began with one installation company in Columbus, which Edwards' father and other family members acquired in 1977. The business stayed small until the younger Edwards joined the company in 1997 and forged an acquisition strategy.

The recent IPO "was the next step in the evolution of our business," Edwards said.

The Edwards family owns 46% of the outstanding shares. Private equity firm Littlejohn, which invested in IBP during the downturn, owns 16%. TCI Holdings owns around 9%. The rest comprises the public float.

IBP stock is up about 28% from the IPO price.



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: IBP , LEN , DHI , PHM , OC

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