Over the last few years, Installed Building Products Inc’s (NYSE:IBP) stock price has increased from around $10 per share in early 2014 and last week, it reached a record high of $61.65, which represented a 381% increase in market capitalization in just five years.
Figure 1: Installed Building Products Inc’s Stock Price is Trading at Record High
Currently, the six market analyst firms that are covering Installed Building Products Inc has assigned an average rating of “Buy” and set a price target of $69.00 per share. Based on the current price of $61.65 per share, this price target offers an additional 11.92% upside potential to secondary investors.
We believe that Installed Building Products Inc’s growth strategy has been absolutely outstanding and they are set to reap the benefit of a growing housing market in the U.S. in the coming two years.
Takeaway from Recent Financial Performance
Figure 2: Installed Building Products Inc’s Revenue Increased by Over 251%
Over the last five years, Installed Building Products Inc’s quarterly revenue has increased from a mere $75 million in Q3 2012 to $282 million in Q2 2017, which represented a 251% growth. A steady stream of revenues from insulation installation has helped them record astounding growth record in the last 60-month period, and this trend is likely to continue in 2018 and beyond.
Figure 3: Installed Building Products Inc Also Managed to Increase Quarterly Gross Profit by 319% in the Last Five Years
While investors were happy to see a tremendous secular growth momentum, supported by a number of macroeconomic factors, Installed Building Products Inc’s management were able to improve their internal efficiencies as well. As a result, their gross profit went up from less than $25 million in the end of 2012 to almost $85 million during the last quarter, representing a 319% increase.
Since their gross profit growth momentum outperformed their sales growth, it was only possible because of the improving internal operating efficiencies.
Figure 4: Installed Building Products Inc’s Quarterly Net Income Growth Has Reached 1230% in Q2 2017
Usually, when small-cap companies experience better than average revenue growth, it often helps to hide the flaws of their operation as management end up spending too much on marketing and promotional activities to support the momentum. However, we were impressed to see how Installed Building Products Inc turned their growth momentum into a profitable business and achieved a 1230 % increase in their net income over the last five years.
Figure 5: Installed Building Products Inc’s Annual ROE Was at 28.63% at the End of 2016
While Installed Building Products Inc was losing money back in 2013, their return on equity (ROE) stood at -12.5% at the beginning of 2014. However, as the revenue grew exponentially in the last few years, and they managed to translate that growth momentum into a positive bottom line, their ROE improved to 137.5% within a year. Although Installed Building Products Inc’s ROE has decreased substantially in the last two years, they still managed to post a 28.63% ROE by the end of 2016.
Why We are Optimistic About Installed Building Products’ Future
Although almost 66% of Installed Building Products Inc’s revenue has been coming from their insulation installation segment, they also have growth potential from other general contracting activities, including waterproofing, garage door installation, and shelving. As the U.S. housing market continues to make new highs and demands consistently outpaced supply, we believe Installed Building Products, Inc is positioned to leverage their growth strategy to outpace competitors and secure a substantial market share over the next few years.
During the Q2 2017 earnings call, Jeff Edwards, the Chairman and Chief Executive Officer of Installed Building Products Inc said that “Momentum in our business remains very strong and I'm encouraged that our sales growth continues to outpace the attractive growth trends in our markets,” which confirmed out bullish bias. Moreover, when he mentioned that compared to the same quarter last year, Q2 2017’s revenue increased by around 33%, it further coagulated the assumption that Installed Building Products Inc’s growth strategy has been a success and as long as the housing sector continues the growth, they will be able to outperform competitors in their geographical segments.
The Bottom Line
While we see a lot of upside potential for Installed Building Products Inc, there are a few things investors need to understand about this company. Overall macroeconomic factors played a huge role in Installed Building Products Inc’s growth in the last few years. Therefore, value investors should keep in mind that Installed Building Products Inc’s PE ratio (NYSE:TTM) is currently hovering around 47, which is way above the industry average of 20.4. Such high PE makes them vulnerable to a price correction if the macroeconomic conditions supporting the U.S. housing market suddenly reverse its course.