On their face, fiscal Q1 results from building products distributor GMS Inc. (NYSE:GMS) don't look like quite enough to support the huge gains GMS stock has posted. In two and a half sessions (as of this writing) since earnings, GMS has rallied 29%.
Yet organic sales growth of 3.4% represents a notable deceleration against the 7% posted in fiscal 2019 (ending April). Steel framing revenue declined on an organic basis, a potential risk given that category provides a leading indicator for wallboard revenue. And GMS' major acquisition of WSB Titan has caused some worries of late given increasing weakness in Canadian single-family housing; results in that market were notably weak in the quarter.
That said, GMS' Q1 is a quarter that looks better upon closer inspection. It shows a company performing well, taking market share and, most importantly given recent trading, pricing. And it answers, at least for now, some of the key worries that led GMS to fall steadily in 2018.
It's a report that seems to support the price target of $37 I cited this summer. But the key worry here is that GMS can't do it alone. End markets need to hold up - and so do equity markets. I'm still happily long at $29+, but I'll take some chips off the table with the recent gains. GMS still should be able to rise from these levels, but the path to upside right now might not be all that straight.
First Quarter Sales Are Stronger Than They Look
GMS' first quarter seems to go in the 'solid, not spectacular' category. But with the stock still cheap heading into the report - it traded at less than 7x EBITDA and less than 8x my FY20 EPS estimate - that's been more than enough.
On the top line, 3.4% organic growth
