Top build is a serial acquirer in the installation and distribution market, mostly in the insulation sector. They’ve basically been a 10 bagger since spinning off from masco in 2015. They acquire smaller fragmented installation and distribution companies and roll them into their own business. They have two segments, installation and specialty distribution.
Installation
Within the installation segment they have a company called Truteam which is basically a bunch of specialty installation business’ from fragmented markets rolled up into one. The services they offer seem strange if you aren’t familiar with the construction industry, but if you are, it makes a little more sense why they would attempt to consolidate this part of the industry. These are services that many contractors don’t want to do, and also don’t require extensive construction knowledge to perform.
For example, the biggest part of their installation segment is installing insulation, typically in home or commercial buildings. This is an easy but nasty job. Those of you who have done it know exactly what I mean, fiberglass insulation is a huge skin irritant that makes your eyes and lungs burn and your entire body itch if you don’t protect yourself properly. But at the same time you only need to know how to use a stapler to install it.
Which means this is a trade that is more easily scalable has higher margins because cost can easily be controlled. Installers like Truteam keep their cost’s low because they don’t have to pay their employees very high wages like say a plumber or electrician, because installing insulation doesn’t require a large skillset. Their installation segment as a whole has higher operating margins than their distribution segment, around 18% for installation vs around 14% for distribution.
Another example of the random things they install are shower doors, this is another job that some contractors choose to outsource because shower doors are huge, heavy sheets of glass that are a pain in the butt to install and also carry the liability of possibly breaking.
They also do a handful of other small easy things that require minimal construction knowledge like installing rain gutters, bathroom hardware and weather proofing. Again, these are easy low skilled services. In construction your biggest cost will always be labor. So the best business’ are always simple, repeatable, predictable and profitable.
Also within the installation segment they have Home services which is basically a group services including, pre-construction plan reviews, diagnostic testing, and various inspection services; and home energy rating services.
Distribution
They have two business’ within the specialty distribution segment, service partners and distribution international. There is obvious integration and synergies between their installation and distribution services because they cut out the middle man by distributing their own products.
Service partners distributes different types of residential and commercial insulation primarily for new construction applications. This is the stuff you see behind your walls in your house that we talked about above.
Distribution international on the other hand Distributes mechanical insulation which is the kind found around pipes, HVAC lines and different industrial and commercial applications that need to be insulated from external temperatures.
management
The current CEO, Robert Buck began at working at Masco in 1997 and worked his way up within Masco and then become CEO of Top build when they spun off in 2015. I’m definitely encouraged by his experience within the company and the results they’ve since the spin off. They’ve grown earnings and generated decent returns on capital.
One of my favorite ways to calculate return on invested capital is to look at how much capital has been invested into a business over a period of time and then look at how much additional earning power the company is now enjoying because of it. I learned this from a post John Huber did a while back.
Below you can see between 2016 and 2022 they invested an additional $2.24 billion into the business while earnings (EBIT) grew by $676 million during that same period. Their reinvestment rate is fairly high at 94% which means they plowed a lot of capital back into the business. Their return on the incremental capital invested is roughly 30%. In other words, for every dollar of EBIT the earned, they re-invested $0.94 and generated roughly 30% on that investment.
Another thing I like is they repurchase shares, 1,390,667 shares to be exact in 2022. They have reduced their share count by roughly 15-16% since 2016. This is what I personally like to see companies do when they cant find anything more productive to dow with their capital.
valuation
They are guiding to revenue between $4,700-$4,900 and earnings between $445-$523 for 2023. I’m respecting these assumptions for my 2023 figures. This means sales are expected to decline about about 2-5% and margins should be in the 9-10% range if this proves to be true. These are all reasonable assumptions based on a slowing housing market and a challenging macro environment.
These future growth rates are conservative considering the growth they’ve had since the IPO, but they’ve indicated a slow down and I want to assume a recession for this year and possibly next. They’re currently trading at roughly 15x earnings and about 19x next years earnings if they come in at their low end estimates. By the time this newsletter is done i’m sure the price will be a bit higher.
Im tempted to take a small position but its possible I’m just biased and overly confident because I work in the industry. I’ll probably just watch this one for a now and see what it does. Right now I’m tight fisted with my money and very skeptical of the macro environment, so I don’t want to settle for anything less than a no brainer investment. If this company goes back down in the $220-$230 range I might reconsider.
My basic investing philosophy is to find great companies and carefully sketch out a few scenarios 5-10 years out, and if the worst case scenario is acceptable, then Im potentially interested.
Thanks for reading!