Marcus Lindstrom
The following segment was excerpted from this fund letter.
BlueLinx Holdings Inc. (NYSE:BXC)
Coming into 2022, consensus EPS estimates for building products distributor BlueLinx were $10.70. Now, despite lumber prices being down ~65% YTD and new home starts down y/y, with three quarters reported as of the Q3 earnings release, it is looking like they will earn over $31 in EPS – yet the stock is down 30% this year (the stock went from >8x forward earnings to 2.1x trailing).
The average US homeowner gained $60k in home equity in the last 12 months and home equity remains the most predictive indicator for Repair & Remodeling spending (~45% of BXC’s revenues are tied to R&R). The median age of owner-occupied homes is at a record high of 41 years. On top of that, we are just now lapping the critical 20-year anniversary of homes built during the 2002-2006 boom, an age in a home’s life where remodeling spend takes a significant step function higher. This remains an underappreciated R&R driver and we believe it is showing up in the numbers.
Contrary to popular belief, spending on discretionary home remodeling for owner occupied homes is still ~16% below its 2007 peak. The growth in R&R spending as of late has been driven more by the first R, Repair (e.g., new roofing, new siding, HVAC replacement, water heaters, etc.), as opposed to spending on discretionary projects (such as kitchen and bath remodels, new decks, room additions, etc.).
Cumulative Home improvement spending overall post Covid-lockdown is now only $7 billion, or ~1.2% above its long term trendline, thus we think it is safe to infer that lingering fears of significant pull-forward of R&R spending are no longer warranted.
BXC shares trade at a >50% FCF yield on 2022 numbers and a 25%+ FCF yield on our 2023 estimates. With a new management team that is aggressively managing commodity lumber inventories, along with a highly variable cost structure and outsized exposure to what we expect to be resilient R&R spending, at 2-4x FCF we believe BXC remains grossly undervalued relative to its ongoing earnings power.
In our Base Case, we think shares are a double from the $65 range which assumes earnings decline by 50% and the market ascribes a measly 8x multiple, a ~33% discount to its historical average which includes times when leverage was dangerously elevated.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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