Note: All data are as of the close of Thursday, December 11, 2014. Emphasis is on company fundamentals and financial data rather than commentary.
Although the building materials wholesale industry officially belongs to the services sector, for the purpose of this comparison I would rather compare it with the basic materials sector, which the SPDR group of ETFs agrees includes "construction materials" companies.
Yet the key word to understanding this industry is neither "services" nor "materials," but "construction." This industry lives or dies on the state of the construction industry, especially the construction of housing, which includes houses as well as multi-family residential buildings. The industry's strong correlation to housing construction is clearly evident in the following series of graphs.
As depicted below, housing starts in America increased to as much as 2.25 million units annually by the peak of the housing bubble at the very start of 2006, after which they fell to just 500,000 units annually by the start of 2009 for a drop of 77.77%. The recovery since then has been steady, but slow, requiring more than five years to reach the 1 million annual starts of today.
It should come as no surprise that the stocks of the building materials wholesale companies should follow the same pattern as housing starts, as noted below.
During the worst of the economic and housing crises from mid-2007 to early-2009, where the broader market S&P 500 index [black] fell 56% and the SPDR Basic Materials Sector ETF (NYSE: XLB) [blue] fell 57%, the three largest Building Materials Wholesale companies had their roofs cave-in on them, with Louisiana-Pacific Corp. (NYSE: LPX) [beige] falling 94%, Bluelinx Holdings Inc. (NYSE: BXC) [purple] falling 86%, and Huttig Building Products Inc. (NASDAQ: HBP) [orange] falling 97%. Timber!
Of course, when housing construction picked-up again post-crisis, our building materials wholesale companies enjoyed one of the most powerful recoveries of the entire marketplace - save one of the three.
Since the recovery began in early 2009, where the S&P has gained 200% and the XLB has gained 165%, LP and Huttig have built up returns of 1,200% and 1,700% respectively. Yet the second largest Bluelinx has been bending almost every nail, actually shrinking 22% over the period.
On an annualized basis, where the S&P has averaged 34.78% and the XLB has averaged 28.70%, Bluelinx has averaged -3.83%, while LP's and Hutting's averages have gone through the roof at 208.70% and 295.65% per year! Yet these gains are off of even higher levels reached earlier this year.
The future of the building materials wholesale industry as a whole still looks quite solid compared to the broader market despite the expectation that the approaching interest rate hikes will slow construction starts somewhat.
As tabled below where green indicates outperformance while yellow denotes underperformance, over the current quarter the industry's earnings are still expected to beat the S&P's average earnings at some 1.21 times their growth rate. Next quarter's earnings, however, are seen underperforming, a normal occurrence on account of the winter season's lull in construction.
For 2015, earnings are expected to virtually market-perform, most likely due to the first interest rate hikes which will slow home purchases and construction at first. But once the economy adjusts to highest rates (which are expected to rise very slowly), earnings for the industry are seen outgrowing the S&P's average earnings at a robust 1.75 times annually over the next five years.
Zooming-in a little closer, the three largest companies in the space are expected to run pretty much in sync with their industry, as tabled below.
Near term, both LP and Bluelinx are seen shrinking their earnings, with LP suffering more, while both are seen improving next quarter. (Huttig's near term earnings growth estimates are not available.)
Longer term, LP seems to make up to for its hefty near term earnings shrinkage with even heftier growth in 2015, outgrowing the market at some 21.60 times its rate while Huttig grows at a respectable 5.37 times. Though Bluelinx is seen growing the least in 2015, it is expected to grow its earnings faster than all of them over the next five years, growing at an impressive 2.69 times the broader market's rate.
Yet there is more than earnings growth to consider when sizing up a company as a potential investment. How do the three compare against one another in other metrics, and which makes the best investment?
Let's answer that by comparing their company fundamentals using the following format: a) financial comparisons, b) estimates and analyst recommendations, and c) rankings with accompanying data table. As we compare each metric, the best performing company will be shaded green while the worst performing will be shaded yellow, which will later be tallied for the final ranking.
A) Financial Comparisons
• Market Capitalization: While company size does not necessarily imply an advantage and is thus not ranked, it is important as a denominator against which other financial data will be compared for ranking.
• Growth: Since revenues and expenses can vary greatly from one season to another, growth is measured on a year-over-year quarterly basis, where Q1 of this year is compared to Q1 of the previous year, for example.
In the most recently reported quarter, Huttig delivered the greatest revenue growth year-over-year, where Bluelinx delivered the least, even shrinkage.
Since LP's and Bluelinx's year-over-year earnings growth are not available, the metric does not factor into the comparison, though it is worth noting that Huttig's earnings grew at a rather impressive rate.
• Profitability: A company's margins are important in determining how much profit the company generates from its sales. Operating margin indicates the percentage earned after operating costs, such as labor, materials, and overhead. Profit margin indicates the profit left over after operating costs plus all other costs, including debt, interest, taxes and depreciation.
Of our three contestants, Huttig operated with the widest profit and operating margins, while LP contended with the narrowest - which were negative along with Bluelinx's profit margin, denoting loss.
• Management Effectiveness: Shareholders are keenly interested in management's ability to do more with what has been given to it. Management's effectiveness is measured by the returns generated from the assets under its control, and from the equity invested into the company by shareholders.
For their managerial performance, Huttig's management team delivered the greatest return on assets, where LP's team delivered the least, which was negative denoting loss of assets.
Since Bluelinx's return on equity is not available, the metric does not factor into the comparison. Though it is worth noting that Huttig's return on equity was quite impressive, while LP's was negative, denoting loss of shareholder equity.
• Earnings Per Share: Of all the metrics measuring a company's income, earnings per share is probably the most meaningful to shareholders, as this represents the value that the company is adding to each share outstanding. Since the number of shares outstanding varies from company to company, I prefer to convert EPS into a percentage of the current stock price to better determine where an investment could gain the most value.
Of the three companies here compared, Huttig provides common stock holders with the greatest diluted earnings per share gain as a percentage of its current share price, while Bluelinx's DEPS over current stock price is lowest - which was negative along with LP's, denoting loss.
• Share Price Value: Even if a company outperforms its peers on all the above metrics, however, investors may still shy away from its stock if its price is already trading too high. This is where the stock price relative to forward earnings and company book value come under scrutiny, as well as the stock price relative to earnings relative to earnings growth, known as the PEG ratio. Lower ratios indicate the stock price is currently trading at a cheaper price than its peers, and might thus be a bargain.
Among our three combatants, LP's stock is cheapest relative to 5-year PEG, where Huttig's is the most overpriced.
Since Bluelinx's price to forward earnings and company book value are not available, neither metric factors in the comparison. Though it is worth noting that LP's stock is very overpriced relative to forward earnings, while Huttig's represents a more attractive value.
B) Estimates and Analyst Recommendations
Of course, no matter how skilled we perceive ourselves to be at gauging a stock's prospects as an investment, we'd be wise to at least consider what professional analysts and the companies themselves are projecting - including estimated future earnings per share and the growth rate of those earnings, stock price targets, and buy/sell recommendations.
• Earnings Estimates: To properly compare estimated future earnings per share across multiple companies, we would need to convert them into a percentage of their stocks' current prices.
Of our three specimens, LP offers the highest percentages of earnings over current stock price for the nearest two quarters, where Huttig offers them in 2015. At the low end of the scale, Bluelinx offers the least percentages for all time periods - all of which are decidedly negative, while LP's and Huttig's percentages are negative only over the near term.
• Earnings Growth: For long-term investors this metric is one of the most important to consider, as it denotes the percentage by which earnings are expected to grow or shrink as compared to earnings from corresponding periods a year prior.
For earnings growth, LP offers the greatest earnings growth in 2015, where Bluelinx offers it over the next five years.
Since Huttig's earnings estimates for the nearest two quarters are not available, the metrics do not factor into the comparison, though it is worth noting that LP's earnings are expected to shrink substantially near term.
• Price Targets: Like earnings estimates above, a company's stock price targets must also be converted into a percentage of its current price to properly compare multiple companies.
For their high, mean and low price targets over the coming 12 months, analysts believe Huttig's stock offers the greatest upside potential and least downside risk, while Bluelinx's stock offers the least upside and LP's offers the greatest downside.
It must be noted, however, that Huttig's stock is already trading below its low target. While this may mean an increased potential for a sharp move upward, it may warrant a reassessment of future expectations.
It must also be noted that Bluelinx and Huttig each has one sole broker making a prognostication, potentially limiting the targets' accuracy.
• Buy/Sell Recommendations: After all is said and done, perhaps the one gauge that sums it all up are analyst recommendations. These have been converted into the percentage of analysts recommending each level. However, I factor only the strong buy and buy recommendations into the ranking. Hold, underperform and sell recommendations are not ranked since they are determined after determining the winners of the strong buy and buy categories, and would only be negating those winners of their duly earned titles.
Of our three contenders, Huttig is best recommended with 1 strong buy rating from its lone analyst, followed by LP with 4 strong buy and 4 buy ratings representing 57.14% of its 14 analysts, and lastly by Bluelinx with no strong buy or buy recommendations from its lone analyst.
Here again, Bluelinx's and Huttig's each having one sole analyst offering a recommendation potentially limits the advice's soundness.
Having crunched all the numbers and compared all the projections, the time has come to tally up the wins and losses and rank our three competitors against one another.
In the table below you will find all of the data considered above plus a few others not reviewed. Here is where using a company's market cap as a denominator comes into play, as much of the data in the table has been converted into a percentage of market cap for a fair comparison.
The first and last placed companies are shaded. We then add together each company's finishes to determine its overall ranking, with first place finishes counting as merits while last place finishes count as demerits.
And the winner is… Huttig with a sturdier financial framework, outperforming in 11 metrics and underperforming in 4 for a net score of +7, followed not far behind by LP, outperforming in 9 metrics and underperforming in 7 for a net score of +2, with Bluelinx still falling apart, outperforming in 3 metrics and underperforming in 13 for a net score of -10.
Where the building materials wholesale industry is expected to outperform the S&P broader market modestly this quarter, underperform significantly next quarter, outperform negligibly in 2015, and outperform meaningfully beyond, the three largest companies in the space are expected to struggle near term before resuming robust growth longer term, with LP outgrowing all in 2015 and Bluelinx outgrowing all beyond.
Yet after taking all company fundamentals into account, Huttig Building Products constructs a more solid investment shelter, given its highest trailing revenue growth, widest profit and operating margins, highest return on assets, highest diluted earnings over current stock price, highest future earnings over current stock price for 2015, best price targets, and highest strong buy analyst recommendation percentage - handily winning the building materials wholesale industry competition, even if its rather questionable price targets and recommendations were omitted.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.