Continental Building Products: A Low-Cost Drywall Producer, Generating Strong FCF And Rapidly Delevering, Poised To Return Capital To Shareholders

| About: Continental Building (CBPX)

Summary

Continental has a strong economic moat revealed through consistent high ROICs above the cost of capital and as a result of having the lowest-cost operations in the wallboard industry.

Continental is well positioned to capitalize on a US housing market turnaround given they currently have 3.3 BSF capacity operating at 67% capacity utilization.

The wallboard industry is 96% correlated to housing starts, which are expected to increase on average 6% annually in the next five years.

Strong FCF Profile: Continental has limited CapEx requirements in the next five years as the company has excess capacity due to $550M of growth CapEx the company spent from 1999-2009.

The management team at Continental is world-class and one with a strong record of cost-controls and is currently well-incentivized by a private equity funded incentive plan.

Introduction & Investment Thesis

Continental Building Products (NYSE:CBPX) is a wallboard manufacturer with low-cost production, high incremental margins (~50% incremental EBITDA margins), trading at a discounted valuation. I'm recommending a purchase of CBP stock at $19.95 with a target price of $32.02 due to the following reasons:

Strong Economic Moat - Strong Margin Profile and Returns on Invested Capital

Continental has constantly posted returns above its cost of capital (WACC: 9.3%), with a three-year average ROIC of 29%. Continental has a wide economic moat through cost advantages. Cost advantages exist when a firm with a structural cost advantage can either undercut prices or charge market prices while earning higher margins - the latter is the case for Continental. Continental is able to charge market prices being charged by industry leaders USG and National Gypsum, while realizing higher margins as a result of lower-cost operations.

Well Positioned to Capitalize on a US Housing Market Turnaround

Wallboard demand is 96% correlated to new housing starts - wallboard demand is agnostic to type of housing starts; whether single-family homes or multi-family, homes being built need drywall. At normalized housing starts of 1.5M, the implied wallboard demand is approximately 30 bsf, approximately 35% higher from 2015 wallboard demand (22.3 bsf). Continental is well positioned to capitalize on a US housing market recovery as they currently have 3.3 bsf capacity operating at 67% capacity utilization.

Limited Capital Spending - Attractive Free Cash Flow Profile

Lafarge spent approximately $550M CapEx from 1999 to 2009 which provides Continental with a favorable position on a cost basis as the company heads into a cyclical upturn, while many industry peers have only recently begun modernizing plants and converting them into synthetic gypsum plants after seeing volumes pick up. FCF yield is currently 13% and FCF conversion has averaged 67% over the past three years and should continue to benefit from high incremental EBITDA margins.

Strong and Well-Incentivized Management Team

The current management team has a strong track record of cost control. From 2007 to 2012, CBP doubled adjusted EBITDA while sales declined 9%. Management is well-incentivised to maximize equity returns due to the long-term incentive plan designed and paid for by Lone Star (PE owner). The incentive plan allows management team to get paid when certain defined monetization events occur.

Highly Discounted Valuation

Continental is currently trading at 9.1x EV/2016 EBITDA and 8.0x my 2016 EBITDA estimate with a LTM FCF yield of 12% trading at 8.3x P/FCF 2015. Valuing CBP on a DCF analysis suggests an intrinsic value of $32.30, assuming a perpetuity growth rate of 2% and a WACC of 9.3%. This represents almost 60% upside from the current trading price of $19.95. A target price $32.02 implies an EV/EBITDA multiple of 8.2x on my 2020 EBITDA estimate, which in a normalized housing market is a reasonable multiple to pay for a high free cash flowing and potentially dividend paying company.

Company Overview & History

Continental Building Products, Inc. ("CBP", the "Company", or "Continental") is a leading pure-play, high margin producer of gypsum wallboard (drywall) and complementary products in Eastern United States and Canada. CBP operates three highly efficient and automated facilities in North America with 3.3 billion square feet of annual capacity operating at 67% capacity utilization as of FY2015A. Gypsum wallboards are a primary building product used in residential and commercial construction market and the repair and remodel (R&R) market. CBP currently has a 10% market share, up from 2% in 1997 (see Figure 4).

Once LaFarge; Private Equity Still Owns 14%. In August 2013, private equity firm, Lone Star purchased Lafarge SA's wallboard division assets for $700.1M. Lone Star turned around the company and sold 26.7% of their stake through an IPO in February 2014. The IPO comprised of 11.76M shares at a price of $14.00 a share, for net proceeds of $151.4M. Net proceeds were used to repay a $149.4M Second Lien Term Loan. Lone Star has been selling their stake in the company and is currently standing with a 14% stake. Since the IPO, CBP has aggressively de-levered from 4.4x Net Debt/LTM EBITDA to 2.2x as of FY2015A and renegotiated a 75 basis points reduction in interest rate on their outstanding debt.

Operations Overview

Continental sells Gypsum wallboard which is a primary building material used in residential and commercial construction markets and the repair and remodel (R&R) market, with new residential construction markets being the most significant contributor of wallboard demand. R&R market currently represents the largest wallboard market as it was affected during the economic downturn but recovered faster than new construction markets. R&R continues to be a strong source of demand as existing U.S. houses are becoming older and foreclosed homes from the housing downturn are rehabilitated.

Continental operates three wallboard plants located in Eastern United States: Palatka, FL (900 MSF), Silver Grove, KY (1.7 BSF - which is the largest wallboard facility in NA), and Buchanan, NY (650 MSF). CBP also has two joined compound facilities (one each in Canada and the United States) and a JV with Rock-Tenn to supply its paper as an input for wallboard. The majority of the company's sales are in the U.S. (92%) and 8% in Canada. Wallboard shipments account for approximately 97% of the revenue with 36% coming from Southeast U.S., 32% from North Central, and 24% from North East (see Figure 1). Continental also manufactures a comprehensive line of joint compounds to complement the products offered by the wallboard segment, which makes up the remaining 3% of revenues.

Source: Author using data from SEC filings

Manufacturing

Continental owns three drywall manufacturing facilities, two joint compound facilities and one JV paperboard liner facility in eastern US and Canada with 3.3 BSF wallboard capacity. Continental's manufacturing facilities have an average age of approximately 11 years. Continental has strategically positioned plants that provide two key benefits (see Figure 2): cost-effective access to supply of synthetic gypsum, which reduces transportation costs, and close proximity to major metropolitan areas to reduce delivery costs. Wallboard has a high weight-to-value ratio which means it's uneconomic to ship outside of 200-300 miles (Source: 2015 Company 10-K). As a result, transportation costs (~22% of COGS) are an important consideration and close proximity to the supply of raw materials and metropolitan areas is essential.

CBP is the only producer in the United States that uses 100% synthetic gypsum. Synthetic gypsum is a substitute to natural gypsum as they are both chemically identical. According to the United States Geological survey, synthetic gypsum costs less than half of natural gypsum on a per ton basis (Source: 2015 Company 10-K). Continental sources their synthetic gypsum from coal-fired plants that operate near Continental's gypsum plants and have long-term agreements with major suppliers with terms ranging from 11 to 35 years. CBP is already 100% synthetic gypsum (17% variable costs), whereas industry peers are only now beginning to increase their use of synthetic gypsum. CBP's Silver Grove and Buchanan plants have supply agreements to supply enough synthetic gypsum to produce at maximum capacity. These contracts were take-or-pay arrangements and prices are at discounted to current market prices because very few companies were competing for supply of synthetic gypsum earlier, as such, CBP currently buys gypsum at discount to market prices.

Distribution

Continental sells a majority of wallboards through wholesale distributors (~64%) and to homes centers (~22%) with Lowes representing 15% of FY 2015 sales (see Figure 3). The remaining 14% is sold to buying groups and other retailers which in-turn sell to professional drywall contractors.

Source: Author using data from SEC filings

Industry Analysis

The NA wallboard industry has consolidated over the past two decades, going from twelve competitors in 1997 to seven currently (see Figure 4). USG continues to dominate the industry with a 26% market share, down from its 1997 market share of 31%, while CBP grew from 2% in 1997 to 10% in 2015. On an aggregate level, CBP has the fifth largest market share in the U.S. However, the wallboard industry is a series of regional markets due to the high weight-to-value ratio of wallboard, dominated by one or two manufacturers in any region. CBP's direct competitors in the markets that it serves include USG, National Gypsum, and Eagle Materials. As a result, in the Eastern U.S. market, CBP has a 17% market share (Source: 2015 Company 10-K). The Eastern U.S. wallboard market contributes 55% of total wallboard demand in the U.S. where Continental is the third largest player (by volume). By specific geographies, CBP is the second largest player in the South East (with ~20% of capacity), third largest in the North Central and North East regions where they also have ~20% of the areas total capacity (Source: 2015 Company 10-K).

Source: Author using data from CBPX Presentation, March 2016

Wallboard Capacity & Pricing

Since the housing downturn, wallboard manufacturers aggressively took out capacity, which fell from 39.6 bsf in 2008 to 17.1 bsf in 2010 (-132% Δ). Between 2010 and 2015, industry utilization rates ranged between 53.1% and 67% (Source: CBP Presentation, March 2016). As a result, CBP wallboard prices bottomed out in 2011 at $110/msf (USG mill-net price) when capacity utilization was 54%. In 2012, there was a change in the pricing structure. Previously, producers offered varying prices throughout the year as demand and capacity utilization retreated and surged. The lack of a consistent price strategy within the industry resulted in highly competitive price environments during seasonally weak periods and made it difficult for producers to hold on to any price increases implemented during the peak demand season. In late 2011, Eagle Materials announced a new pricing scheme where they would announce a price increase that would cover the full upcoming year; this was quickly adopted and now an industry standard. In 2012, USG announced a $40 price increase (+35% y/y), but only 17-27% increase stuck depending on the company and job-quotes outstanding - Continental was able to increase prices 27% in 2012 (Source: 2014 Company 10-K). USG announced another price increase in 2013 and Continental was able to increase prices 17%. The specific structural change that allowed wallboard producers to increase prices was the elimination of job quotes, which were effectively given prices that were good for the duration of a construction project, that could last many years. With the current pricing structure, prices for each customer are only good for the entirety of a given year and change year-over-year. Pricing power is supported by the fact that channel participants benefit from price increases whereas end-customers are fragmented and most are moms-and-pops, and wallboards typically only cost 2-3% of most construction projects (Source: 2014 Company 10-K). Current participants sell branded products that differ slightly on a variety of attributes which makes it difficult for a new participant to take market share by aggressive pricing.

Company Analysis

CBP's management team is exceptional as they made unique strategic changes to their business when faced with industry related headwinds. During the housing downturn, management focused on reducing the cost base and improving efficiency, which lead to industry leading margins. From 2007 to 2012, CBP doubled adjusted EBITDA while sales declined 9% through cost saving initiatives. Key cost saving initiatives included: the idling of two older, inefficient plants while maintaining market share, resulting in a 14% decline in fixed costs and a 16% reduction in energy consumption per million square feet (MSF), and reduced headcount by 53% that lead to a 32% decline in SG&A spend. Continental also made a strategic decision to develop and upgrade manufacturing facilities into 100% synthetic gypsum producing facilities. As a result, CBP has a substantial cost advantage over peers in terms of gross margins because synthetic gypsum is 50% cheaper on a per ton basis. CBP also has hedges on natural gas along with a long-term deal with Rock-Tenn to supply it with paper.

Continental has great cost controls and a strong management that is proven to control costs when sales are declining. Continental also ranks well on being in close proximity to suppliers and customers as shown in Figure 2. Lastly, Continental has favourable long-term contracts with suppliers of synthetic gypsum ranging from 11 to 35 years and a JV with Rock-Tenn to provide 100% of Continental's paperboard liner needs.

Performance Analysis

A business can be analyzed through a variety of lenses, including margin, liquidity, return, risk, and cash flow ratios. In this section, ratio analysis will be conducted on margin, return and cash flow ratios. These ratios are chosen because the wallboard industry's demand is highly correlated to housing starts (which goes through "boom and bust" cycles) and will experience large swings in revenues and profitability. Thus, companies must be analyzed to decipher if improved performance is due to industry tailwinds or changes in company strategy. Another reason for the chosen ratios is to interpret which company possess a competitive advantage and creates value for shareholders. For the purposes of this analysis, CBP is compared against the only two publicly traded wallboard producers, USG and Eagle Materials.

Margin Analysis

In the last three years, margin profiles of wallboard producers have improved with volumes and pricing moving higher as the housing industry bounced off a trough. Since 2011, industry volumes have grown at a CAGR of ~5%, while wallboard prices (USG's mill-net-price) have grown at a ~10% CAGR. CBP currently has the strongest gross margins in the industry due to the state-of-the-art, synthetic gypsum only manufacturing facilities, that results in both lower production costs and the production of a higher quality product that requires no additional product control processes (see Figure 6).

A low cost structure has translated into strong EBITDA margins for CBP and provides a significant advantage over peers. Since 2013, CBP's EBITDA margin has improved from 26% to 30% in FY2015, while industry leader USG's EBITDA margin improved from 12% to 14%. Incremental wallboard volume is poised to translate into strong EBITDA numbers going forward for CBP as incremental EBITDA margins have averaged over 50% (see income statement margin analysis). Again, the reason for CBP's strong EBITDA margin is due to the $550 MM of growth CapEx the company spent from 1999 to 2009 that provides a favorable position on the cost curve compared to other manufacturers operating with older capacity, who have only recently begun modernizing and converting plants into synthetic gypsum plants after seeing volumes pick up.

Return & Cash Flow Analysis

This section will focus exclusively on Return on Invested Capital (ROIC) as it's the best method for measuring capital efficiency and historical cash flow performance of a company; supplementary return measures are shown in ratios table (see Figure 6). Material returns above the cost of capital over a period indicates a company has an economic moat. CBP has consistently posted returns above its cost of capital (assumed constant at calculated WACC of 9.3%), with a three-year average ROIC 29%, compared to industry ROIC of 16% (see Figure 5). ROIC analysis is helpful in determining if a company possesses a competitive advantage, as high ROICs above industry average indicates the company in doing something different. According to Bruce Greenwald, the two sources of competitive advantage are consumer and production advantages.

In my opinion, CBP possesses a "production advantage" as they have the lowest-cost operations in the industry and are able to produce more cheaply than industry competitors as a result of privileged access to cheaper input and operations. The key to CBP's production advantage is barriers to entry and the early-movers advantage. CBP spent a significant amount of growth CapEx to modernize and convert manufacturing facilities to synthetic gypsum producing ones and as a result, has an early-movers advantage by spending capital during a period of industry downturn. Sustainability of high returns is much more important than just earning high returns. Low-cost operators such as CBP generate attractive returns mostly through high NOPAT margins (28%, 3-year average) and modestly through invested capital turnover (1.0x, 3-year average). According to Michael Mauboussin's research on sustainability of high ROICs, there is no simple, systematic way to anticipate sustainable returns. However, operating in a good industry with above-average growth prospects and producer advantage appear to be correlated with persistence of returns.

Source: Author using data from SEC filings

Moving to cash flow ratios, the only cash flow ratio that will be analyzed is FCF margin, as it provides a picture as to how much cash flow is available to the company from sales to engage in shareholder enhancing activities (FCF). CBP has the best FCF margin in the industry with a three-year FCF margin of 19% compared to industry average of 7%. The large spread in CBP's FCF to the industry average is due to the newness of CBP's manufacturing facilities, as CBP's CapEx is a fraction of D&A ($5-$10m, vs. $51m 2015 CapEx), which results in an average three-year FCF conversion ratio of (EBITDA to FCF) nearly 67% compared to industry average of ~30%. EBITDA is higher than gross margin because large D&A expense being added to calculate EBITDA, averaged $52.8M in the last 2 years. For my ROIC calculation and NOPAT, I'm using Michael J. Mauboussin (Credit Suisse) white paper on ROIC. From his paper, "Specifically, NOPAT equals earnings before interest, taxes, and depreciation and amortization (EBITDA) minus the cash taxes attributable to EBITDA. Or, NOPAT = EBITDA - cash taxes".

Source: Author using data from SEC filings

Valuation

Industry Projections

Wallboard volumes are tied to the U.S. new residential, repair and remodel, and commercial construction markets. On an annualized basis, from 1997 to 2015, there is a 96% correlation between housing starts and wallboard demand.

Approximately 50% of U.S. industry volumes are driven by residential repair and remodeling (R&R) activity (see financial model, tab "Wallboard statistics"). Residential R&R is driven by existing homes sales with wallboard volumes lagging an actual home sale by 12-18 months (source). Thus, due to the time lag effect, there is strong visibility into 50% of forward wallboard volumes. Residential R&R wallboard sales are highly correlated to existing home sales, with an 87% correlation (see financial model, tab "Wallboard statistics"). Existing home sales peaked in mid-2013, but fell off sharply as 30-year mortgage rates spiked following U.S. Federal Reserve commentary. Home sales were weak in 2014, but reaccelerated positive throughout 2015. This resulted in flat R&R wallboard volumes in 2014 and negative volumes in 2015. However, given the reacceleration of existing home sales in 2015, should provide high visibility into positive growth in R&R wallboard volume in 2016. My forecast and analysis on R&R activity is reinforced by recent reports published by the Joint Center for Housing Studies of Harvard University. The report states, "After several quarters of slackening growth, home improvement spending is projected to pick-up pace moving into next year…The LIRA projects annual spending growth for home improvements will accelerate from 2.4% last quarter [3Q15] to 6.8% in the second quarter of 2016 (source). As a result, I'm assuming R&R wallboard volumes to increase 5% over the next five years.

Another big driver of wallboard volumes is new residential construction, which has contributed approximately 34% of wallboard volumes over a decade (see financial model, tab "Wallboard statistics"). According to Bloomberg consensus estimates, U.S. housing starts are expected to rise 13% in 2016 over 2015 levels. To put current housing activity into context of the business cycle, the average long-term housing start is 1.5m, approximately 23% from current housing starts of 1.16M (2015). I'm assuming residential construction wallboard volumes to increase at an average of 8% over the next five years. The non-residential construction market is a small driver of wallboard volumes, however, the outlook for the commercial construction market remains positive as well (see financial model, tab "Wallboard statistics"). USG forecasts commercial construction market starts to increase at an average of 8% in the next three years. Aggregating my forecasts for the U.S. wallboard industry by sub sectors, give me confidence in high single-digit volume increases for CBP in the coming years. The incremental volume for Wallboard demand per housing start is approximately 8,000 bsf (USG estimate) (Source: USG 2014 10-K). This estimate is supported by a back-of-the envelope calculation. The housing market reached a peak of 2.1M in 2005 to a 50-year low of 554,000 in 2009. At normalized housing starts of 1.5M, assuming new residential construction holds at 40% of total wallboard demand, the implied wallboard demand is approximately 30 bsf, approximately 35% higher from 2015 wallboard demand (22.3 bsf). The projected wallboard industry volumes projections imply that housing starts will reach 1.5M by 2020E, and the implied growth is in-line with projected industry wallboard volumes (see financial model, tab "Wallboard Industry Forecasts"). Increasing interest rates do have an impact on housing starts as rising rates press housing affordability and therefore slow demand. What is misunderstood however, is that a rate hike signifies that the rest of the economy is doing well. The FED will only begin raising rates as unemployment falls and wages begin to rise. Therefore, the housing market will benefit from the tailwind of increased job certainty and rising wages. In fact, that tailwind could be so strong that it overcomes any negative effects from a rate hike. This next quote from Wells Fargo CEO John Stumpf summarizes my point very clearly, "If we do see some rate increases coming, because it reflects a stronger economy, nobody is going to not buy a house because the mortgage rates went up, they can choose a different product and probably get the same rate. The same thing is true for small businesses."

Company Projections

Revenue Projections

Revenue projections for CBP are simple, as the only assumptions required are on volumes and pricing. Industry wallboard volumes are derived from industry volume assumptions made earlier. CBP volumes are estimated using an assumption on market share. CBP currently has a 10% market share (in terms of volumes) in North America. I'm assuming CBP's market share stays flat at 10% from 2016E to 2018E, and then increases to 11% in FY2019E and held flat thereafter. I believe this is a conservative assumption as CBP has excess capacity to operate at 10% market share without requiring additional CapEx until 2020E. At a 10% market share, CBP capacity utilization reaches 102% by 2020E. With the market share assumptions chosen, CBP will require additional CapEx of $100M to add 500 MSF in 2020E (cost based on analyst estimates). I believe these assumptions again are conservative as the implied average volume growth in the forecast period is 7% (in-line with industry growth rate mentioned in last section). Next, wallboard pricing for CBP are built off of industry analysis. As mentioned earlier, the pricing structure in the industry has shifted to producers announcing annual price increases rather than job quotes. CBP announced a 15% price increase effective April 2016, which will last the entire next year. However, in my pricing assumptions, I'm assuming 10% and 5% price increases in 2016E and 2017E, respectively, and a 3% annual price increase for the remaining forecast period. I believe these assumptions are also conservative if industry volumes grow at mid-to-high single digits, as the industry should be able to push through price at a level higher with higher capacity utilization levels. In aggregate, Net Sales are forecasted to grow at a CAGR of 9.6%, growing from $418.3M in 2016E to $726.5M by 2021E.

Margin & Cost Projections

Cost of goods sold (COGS) is projected based on gross margin assumptions. In the Q4/15 conference call, management indicated that wallboard price and volume increases contribute 65% and 35% to gross margins. This assumption is assumed in calculating the going forward gross margins, which are forecasted to grew from 25.8% in 2015 to 32.6% by 2021E. This again is a conservative assumption as price and volume increase assumptions from the previous section are small. Next, SG&A as a % of sales are held constant 2015 levels of 8% of sales. The tax rate used in the forecast period is CBP's 2015 effective tax rate of 34.5%.

Net working capital was forecasted using an average of the previous three-year day's receivable, day's inventory, and day's payable. CapEx as a % of sales has averaged 1.8% from 2011 to 2015. In the forecast period, CapEx is held constant at 2% of sales per year (except 2020E, where $100M CapEx is assumed). Depreciation and Amortization as a % of Net PPE has averaged 11% from 2011 to 2015. In the forecast period, D&A is held constant at 15% of Net PPE per year (held constant at 2015 levels). Interest rate on debt is held constant at 4.8%, which is the current cost of outstanding debt. Current Net Debt/EBITDA is 2.2x and management has a target of 2.0x. I estimate the company will only need to pay $10M in debt in 2016E, where the ratio would move to 1.8x. Moving to capital allocation decisions, CBP has $40M remaining on a $50M repurchase program in 2016E, and I assume the company to complete the program and continue buying back at an annual rate of $50M per year aside from FY2020E, where I've assumed the $100M CapEx. I've also assumed the company initiates a dividend in FY2018E of $0.23 per share leading to a dividend yield of 1.3% (on current stock price). These shareholder enhancing activities are assumed as the company is highly FCF generative and incentivized by an incentive program to initiate such programs.

DCF Valuation

Valuing CBP on a DCF analysis suggests an intrinsic value of $32.30, assuming a perpetuity growth rate of 2% and a WACC of 9.3%. This represents almost 60% upside from the current trading price of $19.95. The DCF estimated intrinsic value implies an EV/EBITDA multiple of 8.2x on 2020 EBITDA estimate, which in a normalized housing market is a reasonable multiple to pay for a high free cash flowing and potentially dividend paying company (2020 is also where implied housing starts move to long-term average of 1.5M). The discounted cash flow model was driven by the following key conservative assumptions and methodologies:

1) 5 year DCF: I feel a 5 year DCF is appropriate as the industry is cyclical and it's unclear if there are any reasonable long-term growth factors beyond 5 years, given housing starts are dependent on many unpredictable factors longer-term.

WACC

Cost of debt of 4.8% is based on CBP's interest rate on its current outstanding debt. Cost of equity is calculated using CAPM with the following assumptions. A risk free rate of 2.25% is used, corresponding to the 81-year average (1926-2007) 10-year U.S. T-Bill along with a 7.0% equity risk premium (historical U.S. 1926-2007 arithmetic mean). A beta of 0.97 is calculated using comparable company adjusted betas (comparable company unlevered beta is 0.78, in-line with Damodaran's Building Products unlevered beta estimate of 0.85). A small-cap premium of 2.51% (Fama/French, 1990-2015 average SMB). The resulting cost of equity is 11.5% and calculated WACC is 9.3%. The calculated WACC is conservative in my opinion, as shown in the sensitivity analysis, it has a large impact on the share price.

Terminal Value

The terminal value was computed using a terminal growth rate of 2% and a terminal WACC of 9.3%. As mentioned earlier in this report, the wallboard industry is highly correlated to housing start. The long-term (1959-2015) housing starts y/y growth is 1.1%, thus, assuming a 2% sustainable terminal growth rate for CBP is reasonable and in-line with the historic long-term average of U.S. Real GDP growth. These assumptions imply a terminal value for the company of $1.3B, making up 73% of the company's estimated enterprise value.

Conclusion

In summary, I believe CBP represents a compelling opportunity to invest in a low-cost wallboard producer that is well positioned to capitalize on the robust industry growth that is expected in the near future. With a well-defined growth profile, great economics, and a strongly aligned senior management team, there is a good case to be made for future value creation.

I have great confidence in the management team to close the valuation gap on the stock through excellent business performance, and as-well, because the management team is well-incentivized. Insiders have a 0.23% stake in the company and have recently been buying. In the last month, CEO, CFO and SVP have bought 64,435 shares directly in the market at prices ranging $17.22 to $18.32. Management is well-incentivised to maximize equity returns through the long-term incentive plan designed and paid for by Lone Star Equity Partners. The incentive plan allows management team to get paid when certain defined monetization events occur - for example, a change of control or sale of company, or by satisfying a specific cumulative 15% IRR threshold earned by Lone Star by August 30, 2018, or a dividend is initiated (essentially, provides management motivation to maximize equity returns and monetize the company in the next 3 years).

The company has had great profitability over the past three years in terms of EBITDA growth, FCF and ROICs. The main reasons for strong profitability is due to the increase in wallboard volumes and prices, low-cost operations, and strong cost controls.

Overall, I believe that I was conservative in my DCF assumptions, creating a margin of safety that safely allows me to say that CBP is trading well below its intrinsic value. As such, I recommend the purchase Continental Building Products at the current market price of $19.95.

DCF & Sales Model:

Click to enlarge

(click to enlarge) Click to enlarge Click to enlarge

Click to enlarge

Disclosure: I am/we are long CBPX.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.