Stock Building Supply Holdings - Discounted Public Offering, Offers Potential Long-Term Value

Aug.13.13 | About: BMC Stock (BMCH)

Stock Building Supply Holdings (STCK) made its public debut on Friday, August the 9th. Shares of the distributor of building materials ended their first day with gains of 3.1% at $14.43 per share.

As shares were offered at a sizable discount in the public offering, while the company is showing growth again amidst the housing recovery, shares might offer long term appeal. Yet it is crucial for Stock Building that the housing recovery continues to stay.

The Public Offering

Stock building is a diversified lumber and general building materials distributor which sells to both new construction and remodel contractors.

The company thinks it is among the top three LBM suppliers for residential construction in 80% of the geographic markets in which it operates. The company has an assortment of 39,000 products sourced through its suppliers. Stock building has operations in 13 US states. Yet these large states account for 48% of the total US housing market permits being granted each year.

Stock Building Supply Holdings sold 7.0 million shares for $14 apiece, thereby raising $98 million in gross proceeds. Some 4.4 million shares were sold by the company, thereby raising $62 million. The remaining 2.6 million shares were offered by selling shareholders.

The public offering values the equity of the firm at $359 million. The offering took place below the preliminary $16-$18 offer range. As investors fear the impact of increasing interest rates on the housing market recovery, Stock Building cut the size of its offering from 8.8 million to 7.0 million shares. Actually it were selling shareholders which cut their portion of the planned offering.

Some 17% of the total shares were offered in the public offering. At Monday's closing price of $14.60 per share, the firm is valued at $373 million.

The major banks that brought the company public were Goldman Sachs (NYSE:GS), Barclays (NYSE:BCS), Citigroup (NYSE:C), Baird, Stephens and Wells Fargo (NYSE:WFC).

Valuation

Stock Building operates in a highly fragmented LBM distribution industry. Demand for its products is created by new residential construction, repair and remodeling. After a few tough years, the US market for US housing starts will start to approach the long term average, according to research reports to be found in Stock Building's S1-Filing.

For the year of 2012, Stock Building generated annual revenues of $942.4 million, up 24% on the year before. The company reported a $24.0 million net loss, cutting net losses by roughly half compared to 2011.

First quarter revenues rose by 32% to $248.7 million. Losses continued to narrow to $4.8 million.

Stock Building operates with $5.8 million in cash and equivalents. The company operates with $142.5 million in debt and preferred stock for a net debt position of around $137 million. Factoring in the $62 million in gross proceeds from the public offering and the net debt position will narrow towards $80 million.

As such, Stock Buildings operations are valued at 0.4 times annual revenues.

Investment Thesis

As noted above, the offering of Stock Building Supply Holdings has been disappointing. Shares were offered below the low end of the preliminary offering range. Despite modest 3.1% opening day gains, shares are still trading some 14% below the midpoint of the preliminary offer range.

Yet, the company came with quite an upbeat outlook for the second quarter in its filing. Second quarter sales are expected to come in between $313.7 and $315.3 million, up 28% from last year. Net income is expected to come in between $1.3 and $2.3 million, compared to a $2.2 million loss last year. At this rate annual revenues of $1.2 billion are attainable, while the company could roughly break-even.

It is important to understand the potential for the company. With its current footprint, Stock Building generated $1.8 billion in sales back in 2006. Sales absolutely plunged during the recession as the company posted large losses. Yet revenues are showing healthy increases again and the company is on the verge of reporting profits.

As such, the current valuation seems reasonably attractive at 0.3 times annual revenues, given the lack of a sizable debt position and the prospects for profits. Still, demand for the offering has not been great given the recent hick-up in interest rates and the lack of current profitability of the firm. Given the cost initiatives which have been made in recent years to boost operational excellence, the company could report meaningful profits in 2014 and beyond, given that rates don't rise much further and derail the housing market.

Stock Building might offer an interesting investment to play a continued recovery of the housing market. The company has a relatively high break-even point, but lack of significant debt and continued attempts to lower costs should alleviate these worries. After the discounted public offering, shares might offer long term appeal provided that the housing recovery does not end anytime soon.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.