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Investment Thesis
BlueLinx Holdings (NYSE:BXC) is a wholesale distributor of building and industrial products. It is very well positioned to benefit from two different dynamics. On the one side, you have a massive amount of pent-up demand for single-family housing, which requires a lot of lumber.
On the other side, you have supply constraints, and near all-time high lumber prices. Yet, as you'll see, BlueLinx has been able to pass these elevated costs to customers.
Furthermore, BlueLinx's new CEO is intent on moving the business to increase its exposure to high-value specialty products.
Altogether, this has culminated in a massive amount of operating leverage, where 27% y/y revenue growth translated into a 110% y/y increase in EPS.
Given all these positive macro factors working together, BlueLinx is setting up its share repurchase program, with the goal of returning to shareholders approximately 8% of its market cap over the next several months.
Best of all? This stock is priced at 3x EPS.
Investor Sentiment Has Been Unquestionably Choppy
Author coverage of BlueLinx
Slightly over a month ago, I highlighted BlueLinx as a stock worthwhile considering. In my typical fashion, I managed to pick the recent peak to initiate coverage of the stock. And as such, the stock went into a meaningful sell-off.
However, as you'll read, fundamentally, the business is in impressive shape. So, if I was bullish before, at a higher price, I can assure you that I'm bullish now.
Robust And Durable Revenue Growth Rates
BlueLinx revenue growth rates
BlueLinx reported 27% y/y top-line growth against one of the toughest quarters of the year. What this means in practical terms is more than just BlueLinx beating revenue estimates this quarter.
BlueLinx revenue consensus estimates
It means that it's now highly likely that analysts are going to have to upwards revise their revenue estimates for the remainder of 2022.
And that's exactly the type of investment setup you want to be positioned in.
You want to be positioned in a situation where analysts are raising their price targets and extolling praises about your company because their financial models are misaligned with the company's fundamental trajectory.
If you buy a stock cheaply, and analysts upwards revise their revenue estimates, that's a powerful combo.
Why BlueLinx? Why Should I Care?
Dwight Gibson became the President and CEO of BlueLinx Holdings in the middle of last year and he appears to have taken the company in a new direction, with might.
BlueLinx Q1 2022 investor presentation
The renewed focus for the wholesale distributor of building and industrial products is now on its specialty product mix.
To illustrate, in last year's Q1, specialty products, which is a higher margin product, made up 55% of its total revenues. Whereas in the current quarter, specialty products made up 59% of its total revenue.
Similarly, this has been echoed in BlueLinx's gross margin profile. For example, in Q1 of last year, specialty products made up 60% of its gross margins, while this time around this has increased to 63%.
BlueLinx Q1 2022 investor presentation
Consequently, these slight improvements in its gross margin profile saw its gross profits jumping by 62% y/y.
Consequently, for a business with a meaningful portion of its costs fixed, you end up with a significant amount of operating leverage. And that's what's happened here, where its EPS numbers jumped by 110% y/y.
8% Yield to Shareholders
Before discussing its share repurchase program, let's spend a moment on its balance sheet. In my previous article, I made a big deal of the fact that BlueLinx's balance sheet during Q4 2021 was at 1.1x of net debt to EBITDA, down from 3.5x in the Q4 of the prior year.
BlueLinx Q1 2022 results
Similarly, I'm now going to make the same remark. BlueLinx's balance sheet carries net leverage of 0.9x. That's a great position to be for a cyclical company.
Given that BlueLinx's balance sheet is now in a robust position, management believes that its best use of capital is to repurchase shares in the company, thereby signaling to investors that the stock is undervalued.
BlueLinx has a $60 million accelerated share repurchase program to be completed at some point in H2 2022. Given that we are already 1 month into Q2 2022, H2 2022 is a rather imminent deadline.
Additionally, BlueLinx has a further approximate $30 million share repurchase program outstanding, that's open-ended.
In the worst case, this means that BlueLinx returns to shareholders 8% of its market cap via share repurchases. In the best-case scenario, BlueLinx repurchases up to 12% of its market cap over the next 12 months.
BXC Stock Valuation - Priced at 3x EPS
Here's what we know. For Q1 2022, BlueLinx's EPS was $13.19. Now, if we take analyst estimates and very slightly upwards revise the EPS estimates given the improved outlook and meaningful share repurchase program, I believe that for the next 3 quarters of the year, combined with Q1 that's already reported, BlueLinx's EPS could reach $25.49 in 2022.
Essentially, for this estimate to work out, it means that the next 3 quarters of 2022 simply match Q1. I believe that for this estimate to work out, you don't need any heroics.
The Bottom Line
BlueLinx put out an impressively strong report. Warren Buffett frequently extolls an investment where you buy stock in the company and get a meaningful capital return via buybacks. And BlueLinx fulfills this in spades.
BlueLinx offers shareholders an 8% yield via share repurchase offer the next few months. And up to 12% potential returns over the next twelve months. Altogether, I believe this is an attractive space to be in.
For disclosure, I don't own shares in BlueLinx. I own shares in a peer, Builders FirstSource (BLDR), that hasn't yet reported its earnings. Whatever you decide, good luck and happy investing.
