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GMS Flags $250 Million Share Repurchase Amidst a Challenging Environment – Buyback Wednesdays

  • October 25, 2023

GMS is a distinct home construction supply company with a broad array of products that prioritizes value-added service by delivering its products directly to the spot of use. This may include delivery to a single-family home or to locations like the 20th floor of an office building.

The company has expanded its range of products through numerous acquisitions while maintaining a manageable level of debt. It’s worth noting that the company’s long-term debt has decreased for four consecutive quarters, dropping from $1.1 billion in July 2022 to $943 million in July 2023 even as it pursued some of those acquisitions.

GMS products image

GMS Inc. (GMS): $57.32

Market Cap: $2.33B

EV: $3.53B

Key Insights

  • GMS diversified its product offerings with over 20,000 unique items and extended its market presence through acquisitions.
  • The company spent 53% of its free cash flow on acquisitions and 18% on share repurchases over the last three fiscal years.
  • GMS reported strong Q1 FY2024 results despite lowered steel prices and tough market conditions.
  • Sales of steel framing, which is 19% of the company’s business, have declined by 25.5% YoY due to deflationary pricing.
  • A decrease in single-family housing demand and lower steel prices may negatively impact the company’s future sales.

GMS is a North American specialty building products distributor. Founded in 1971, GMS operates a network of over 300 distribution centers and approximately 100 tool sales, rental, and service centers. The company provides a comprehensive selection of building products and solutions for its residential and commercial contractor customer base across the United States and Canada. Its extensive product offerings include wallboard, ceilings, and complementary construction products, steel framing items, insulation materials, lumber, other wood products, and ready-mix joint compounds. Complementary products consist of lumber, tools, fasteners and insulation among other products.

The company’s net sales are primarily driven by wallboard and complementary products, which together contribute 69% of total net sales. Steel framings and ceilings make up the remaining 31%.

GMS-net sales breakdown

Source: GMS (Investor Overview)

The residential end market contributes 45% and the commercial end market accounts for 55% of the company’s portfolio.

GMS has consistently outperformed the S&P 500 over the last five years. The stock price is up by 29.29% over the last year, compared to the S&P 500’s gain of 13.19%.

Trends in the Construction Market

The national average 30-year mortgage rate rose for the sixth week in a row to 7.63% in the third week of October. Given current rates, it’s no wonder that year-over-year existing home sales sagged for the third consecutive month, slipping by 0.7%, with all four major U.S. regions posting declines, according to the National Association of Realtors (NAR).

Multi-family construction remained a positive spot.

The most recent National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) that tracks builder sentiment, sank from 56 in July to 40 in October, putting builder confidence back into negative territory. A reading of 50 or above means more builders see good conditions ahead for new construction.

Given the negative backdrop, companies related to housing will suffer, including GMS.

Projects Underway

Despite some of the challenges on the residential housing side, GMS has displayed notable success in the healthcare sector, securing contracts for at least 10 hospital expansion or construction projects. Additionally, it has commitments to provide products for ventures in the hospitality industry, including the new Gaylord Resort in San Diego and a convention center with a hotel in Fort Lauderdale. The company has also secured projects in manufacturing, data centers, education, and office spaces. This includes supplying materials for a pier in Boston, continuous deliveries for a significant government office tower renovation project in Quebec, and materials for a new office tower in Bellevue, Washington.

Revenue Growth

The company has experienced solid growth over the last ten years. Its revenue increased from $1.35 billion in FY2014 to $5.33 billion in FY2023 (fiscal year ends in April) which resulted in a 10-year CAGR of 16.46%. However, the estimated forward revenue growth of 5% is less compared to the sector median’s estimated growth of over 8%.

Valuation

GMS appears undervalued, evident from its forward P/E of 8.29, which is below the sector median of 19.1, and a forward EV/EBITA of 5.93, also lower than the sector median. This perceived low valuation might be a factor driving the management’s decision to announce a share buyback.

Acquisitions

GMS has expanded its product portfolio and increased its market share through several acquisitions. Since August 2014, the company has acquired 45 companies representing a total of approximately 126 distribution locations. Following the acquisition of AMES Taping Tools in December 2021, GMS has opened 15 new AMES store locations. In fiscal 2023, the company furthered the growth of its complementary products by completing three acquisitions including Blair Building Materials, Engler, Meier & Justus, and Home Lumber & Building Supplies.

On October 2, 2023, GMS continued the execution of its growth strategy with the acquisition of AMW Construction Supply, LLC, a distributor of tools and fasteners used in both residential and commercial framing and concrete projects. In addition, the company announced the recent openings of two new greenfield yards and two new AMES store locations.

Share Repurchases

GMS uses share repurchases instead of dividends to return capital to shareholders. The company allocated 18% of its cash for share repurchases over the last three years. The company has retired around 5.7% of its outstanding shares since July 2021. For the full fiscal year 2023, GMS repurchased 2.3 million shares for $110.6 million at an average price of $48.74 per share. In the first quarter of fiscal 2024, the company repurchased approximately 469,000 shares for $30.5 million at an average cost of $65.07 per share.

GMS - Shares outstanding graph

Source: InsideArbitrage

On October 18, 2023, the company’s Board of Directors approved a new $250 million share repurchase program that terminates and replaces its previous share repurchase authorization of $200 million, which commenced in June 2022 and had approximately $35 million of authorization remaining. The new authorization represents around 10.6% of its market cap at announcement.

Balance Sheet & Debt

At quarter-end, the company had $85.4 million in cash and short-term investments. The free cash flow for the first quarter of FY2024 was negative compared to a strong free cash flow of $185.4 million generated in the previous quarter. This might be primarily driven by recently acquired businesses. GMS also had $816.2 million of available liquidity under its revolving credit facility. Its current assets are significantly greater than its current liabilities. Currently, it has $880 million in net debt excluding capital leases.

GMS -debt maturities

Source: Edgar (10Q filing)

The company refinanced its term loan, extending its maturity date by seven years to 2030. It faces no near-term debt maturities. Its net adjusted EBITDA debt leverage at the end of the quarter improved to 1.5 times from 1.8 times a year ago. It also initiated new interest rate swap agreements to reduce rates, ensuring more consistent interest payment cash flows, and hedging future interest rate escalation.

Q1 FY2024 Results

Source: GMS (Investor Overview)

After a solid fiscal 2023, GMS had a decent first quarter, beating revenue and EPS estimates. This was mainly driven by the sale of complementary products and increased wallboard volumes offsetting the loss due to a downturn in steel sales and single-family construction.

  • GMS reported net sales of $1.40 billion, up 3.7% compared to $1.35 billion in Q1FY23. This growth was mainly fueled by its recent acquisitions, resilient pricing, increased sales of wallboard, ceilings, and complementary products and continuous commercial construction demand.
  • Prices for steel framing products were down as expected with specific declines of 25.5% year-over-year.
  • Complementary products sales of $426.2 million for the quarter grew 7.7% year-over-year or 6% on a same-day basis.
  • Gross profit of $450.6 million increased 3.6% as compared with the prior year period, mainly due to incremental profit from recent acquisitions.
  • EPS for the quarter was $2.40 beating estimates by $0.02.
  • Selling, general and administrative expenses increased during the quarter to $286.8 million compared to the prior year’s $267.7 million primarily driven by recently acquired businesses, inflationary wages and higher maintenance costs.
  • Net income decreased 3% to $86.8 million for the quarter or $2.09 per diluted share compared to net income of $89.5 million or $2.07 per diluted share a year ago.
  • Adjusted EBITDA margin decreased to 12.3% compared to last year’s first quarter level of 12.9%.

Outlook for FY 2024

Given the current headwinds and affordability issues, the company expects some modest degradation of wallboard prices and net sales in the coming quarters with likely sequential stabilization in the back half of its fiscal year. It has provided a conservative outlook for the second quarter as well as for the whole year.

GMS - FY2024 outlook

Source: GMS (Investor Overview)

Risks

The building products industry within the housing sector is often highly competitive. Companies must continuously innovate, provide value-added services, and maintain competitive pricing to retain and attract customers.

Despite achieving higher net sales, the company has struggled to translate these gains into growing profits. Free cash flow was negative last quarter.

Managing acquisitions effectively poses another potential challenge for the company.

Bottom Line

The company’s strong financial performance, effective strategic acquisitions, and strong liquidity position underscore its capacity to manage market volatility. The company exceeded EPS estimates in seven of the last eight quarters and surpassed revenue estimates in all eight quarters.

Initiating a new position in the stock at this moment might entail some risk due to unfavorable housing conditions. I would like to wait for more favorable market conditions before I would get interested in a position like this one.


Welcome to edition 82 of Buyback Wednesdays, a weekly series that tracks the top stock buyback announcements during the prior week. The companies in the list below are the ones that announced the most significant buybacks as a percentage of their market caps. They are not the largest buybacks in absolute dollar terms. A word of caution. Some of these companies could be low-volume small-cap or micro-cap stocks with a market cap below $2 billion.

The level of buyback announcement activity increased significantly, with fifteen companies declaring buybacks, in contrast to three companies in the previous week.

Top 5 Stock Buyback Announcements 

1. GMS Inc. (GMS): $57.32

On October 18, 2023, the Board of Directors of this building products distributor approved a new $250 million share repurchase program, equal to around 10.6% of its market cap at announcement. This is equal to around 2.8% of its market cap at announcement.

Market Cap: $2.33BAvg. Daily Volume (30 days): 268,016Revenue (TTM): $5.38B
Net Income Margin (TTM): 6.14%ROE (TTM): 26.49% Net Debt: $880M
P/E: 7.32Forward P/E: 8.29EV/EBITDA (TTM): 5.6

2. William Penn Bancorporation  (WMPN): $12.11

 On October 18, 2023, the Board of Directors of this bank authorized a new stock repurchase program to acquire up to 1,046,610 shares, or approximately 10.0%, of the company’s currently outstanding common stock, commencing upon the completion of the company’s existing stock repurchase program.

Market Cap: $121.22MAvg. Daily Volume (30 days): 52,600Revenue (TTM): $23.89M
Net Income Margin (TTM): 8.18%ROE (TTM): 1.23% Net Debt: $41.91M
P/E: 74.76Forward P/E: N/APrice/Book (TTM): 0.97

3. Medalist Diversified REIT, Inc. (MDRR): $5.25

On October 19, 2023, the Board of Directors of this commercial REIT approved the repurchase of an additional 200,000 shares of the company’s common stock for a maximum price of $6.00 per share, equal to around 9% of its market cap at announcement.

Market Cap: $11.79MAvg. Daily Volume (30 days): 3,008Revenue (TTM): $10.57M
Net Income Margin (TTM): -46.02%ROE (TTM): -25.48% Net Debt: $62.60M
P/E: N/AForward P/E: N/AEV/EBITDA (TTM): 22.35

4. RTX Corporation (RTX): $78.38

On October 24, 2023, the Board of Directors of this aerospace and defense manufacturer announced that it has approved a $10 billion accelerated share repurchase program, equal to around 8.8% of its market cap at announcement.

Market Cap: $113.81BAvg. Daily Volume (30 days): 8,541,602Revenue (TTM): $70.57B
Net Income Margin (TTM): 7.88%ROE (TTM): 7.81% Net Debt: $31.53B
P/E: 19.39Forward P/E: 23.87EV/EBITDA (TTM): 16.13

5. Linde plc (LIN): $367.26

On October 23, 2023, the Board of Directors of this industrial gas company announced that it has approved a new share repurchase program for up to $15 billion, equal to around 8.4% of its market cap at announcement.

Market Cap: $179.20BAvg. Daily Volume (30 days): 1,356,995Revenue (TTM): $33.09B
Net Income Margin (TTM): 17.20%ROE (TTM): 14.16% Net Debt: $14.13B
P/E: 31.90Forward P/E: 30.57EV/EBITDA (TTM): 17

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