Fiscal 2019 was a good year for wallboard distributor GMS (NYSE:GMS). Organic revenue increased 7%. The acquisition of Canada's WSB Titan, which closed in June 2018, proved accretive. Adjusted EBITDA increased 48%, thanks to help from Titan, a conversion to capital leases, and organic growth.
That said, it was hardly a great year. Expenses came in higher than expected in Q3 and Q4, leading to a pair of earnings misses. Gross margins - a key investor recent concern in the last two years - compressed again, if modestly. End markets saw a good deal of disruption, and there are worries about Titan's exposure to new construction in Canada. GMS shares have rallied of late, but remain down 11.7% over the past year, and off some 45% from all-time highs reached (briefly) in late 2017.
After the rally of late - GMS has risen 22% in the last eight sessions - the question is whether a merely good year is good news for the stock. From one perspective, GMS clearly has room for improvement, and easy compares as it begins a key fiscal 2020 (ending April 30). From another, the minor issues last year might be a harbinger of trouble for a company with EBITDA margins still under 10% near what may be the end of a macro upcycle.
I've been bullish on GMS going back to last year, and from here the stock still appears undervalued. GMS remains cheap both on an absolute and relative basis, particularly when looking at its closest peer. New residential construction is a concern, but GMS' exposure is manageable. End markets appear to have settled, and continued deleveraging on its own suggests reasonable upside for the equity. The risks are real, but barring a quick cyclical shift GMS should continue to rally.
