Two weeks ago, Boise Cascade Company (BCC) made its public market debut, on February 6th. Shares of the vertically integrated wood products manufacturer and building materials distributor ended their first day with gains of 24.5% at $26.15 per share. Shares have continued to gain ground, currently exchanging hands at $27.94.
The Public Offering
Boise Cascade is a vertically-integrated wood manufacturer and building material distributor with operations spread out through the United States and Canada. The company is the second largest manufacturer of laminated veneer lumber and plywood in North America, according to the Resource Information System.
Boise's products are used for residential construction, repair, remodeling and light commercial and industrial applications. The company serves over 4,500 customers including wholesalers and home improvement centers.
Boise Cascade sold 11.8 million shares for $21 apiece. The company raised $248 million in gross proceeds in the offering process, valuing the company at $872 million. All shares were sold by the firm, with no shares offered by selling shareholders.
The offering was a great success. The offer price was set above the preliminary $16-$18 price range set by the firm and its bankers. Some 28% of the shares outstanding were offered in the public offering. At Friday's closing price of $27.94, the firm is valued at $1.16 billion.
The major banks that brought the company public were JPMorgan, Bank of America/Merrill Lynch, Deutsche Bank, Goldman Sachs and Wells Fargo, among others.
Boise Cascade operates 18 manufacturing sites and 31 distribution facilities in North America. The company derives 70% of its revenues from building materials distribution which is a high volume, low margin business, as it only generates 27% of its total EBITDA.
For the full year of 2012, Boise anticipates to generate revenues of $2.77-$2.79 billion. The firm is expected to report net income of $39.2-$43.2 million on annual EBITDA of $94.3-$98.3 million.
The company is already benefiting from a recovery in the housing market as fourth quarter revenues are expected to come in at $695 million (at the midpoint of the company's guidance), up 27.0% compared to the year before. The company is expected to roughly break-even after reporting a $13.8 million loss in the final quarter of 2011.
The company operates with approximately $225 million in cash and equivalents following the public offering. Boise recently borrowed $250 million in 6.375% notes due in 2020, for a net debt position of $25 million. The firm will use the proceeds of the offering to repay $25 million in debt but will leave the rest of the proceeds for normal operations.
Based on Friday's valuation of $1.16 billion, the market values the firm at 0.42 times 2012's annual revenues, 12 times annual EBITDA and 28 times annual earnings.
The offering of Boise's shares has been a great success. Shares were initially offered 23.5% above the preliminary offering range and closed 64.3% above the midpoint of the preliminary offering range on Friday.
The prospects for Boise Cascade look good as the housing market is in recovery. In November of 2012 the single- and multi-family housing starts ran at 0.86 million per year, up from 0.61 million for the full year of 2011. Despite the recovery, the numbers are still far removed from the 50-year average of 1.50 million housing starts per year.
While the housing market continues to recover, and Boise Cascade's operating performance is expected to improve, the valuation is already a little rich. As shares are already trading almost two-thirds above the midpoint of the preliminary offering range, the valuation multiples have increased to 12 times annual EBITDA and 28 times annual earnings.
As the housing market is expected to continue to recover, it might still experience temporary setbacks, and it is questionable whether historical building rates are attainable in the medium term.
Another worry is the large pension funding obligations of the firm. The low interest rate environment resulted in large underfunding with Boise's defined benefit pension plan being underfunded by $188 million at the end of 2011, on total obligations of $470 million. These estimates are based on a discount rate of 4.2% with each percent in lower interest rates costing another $72 million.
At this stage in the recovery, with booming housing stocks and a much richer valuation attached to the sector, the interesting opportunity might have already passed. Recently TRI Pointe (TPH), a newly formed construction company, went public at sky-high valuations.
With a strong performance in shares of Boise Cascade in recent weeks, shares are already priced for perfection and I would not consider paying these valuation multiples for such a mature business, despite the cyclical and structural improvements in the industry.