BlueLinx: A Leveraged Way to Invest in a Housing Recovery

| About: BlueLinx Holdings, (BXC)

BlueLinx (NYSE:BXC): $3.15 on NYSE on October 29, 2010

52 week price range: $6.32 – 2.24
Shares outstanding: 32.7 million
Market cap: $103 million
Net debt: $429 million
Enterprise value: $532 million
An important element of security analysis is estimating a fair value for a stock and the price at which the company might be acquired, and there are numerous analytical methodologies that can be used to estimate an appropriate value. However, the simplest measure of this value is what someone is actually willing to pay to buy the stock. In the case of BlueLinx this value is known, since the private equity firm Cerberus, which owns about 55% of the company, recently made a tender offer to buy all of the publicly held stock at $4.00 per share.
On July 22, 2010 Cerberus announced that it intended to make a tender offer at $3.40 per share for all of the publicly held stock of BlueLinx that it did not currently own. The tender offer was conditioned upon, among other things, the tender of enough stock whereby Cerberus owned at least 90% of the total shares outstanding. The offer price was subsequently raised to $4.00 per share, but not enough shares were tendered, and on October 19, 2010 Cerberus announced that it was returning all tendered shares and not proceeding with the offer.
Based on the fact that Cerberus was willing to pay $4.00 per share, it is reasonable to believe that the stock is currently undervalued at its current market price. However, a fair value for the stock may be higher than $4.00.
BlueLinx is one of the largest wholesale distributors of building products in the U.S. and is highly leveraged to new home construction. Based on the significant decline in housing starts from a peak in 2005 the company has been losing money in recent years. However, as homebuilding activity returns to more normal levels in coming years, the company will become profitable again.
BlueLinx has a highly leveraged balance sheet. However, the company has a credit facility that should be adequate to insure the company’s survival.
In my long-term income model I show 2009 as the trough year in housing starts and earnings, with year over year improvements thereafter out through the forecast period of 2015. The company will not become profitable until 2012, but over this forecasting period the company can generate free cash flow that in a DCF model implies a discounted present value of about $9.00 per share. In this DCF model the terminal value of the stock at the end of 2015 is about $18.00 per share.
The stock is currently undervalued based on what Cerberus was willing to pay in their recent tender offer. Cerberus has said that they will not increase their offer above $4.00 per share. However, this statement may just have been a bargaining ploy and an increase could be forthcoming in which case investors could realize a relatively quick gain from the current price level. Otherwise a reasonable intermediate price target for the stock is $9.00, and within five years $18.00 per share might be attainable.

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Disclosure: Terry Schumacher owns shares of BXC.

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