The potential success Stock Building Supply’s initial public offering (IPO) may say less about the long-term viability of the Raleigh, N.C., company than about investor perceptions of the strength of the LBM industry as a whole.
Whether investors flock to Stock’s IPO depends largely on the company turning attention away from continuing losses over the past several years and toward the potential upside reflected in strong sales growth and a recovering economy.
“We’ve seen private equity investors invest in a number of building material companies in the hope that they’re getting in with these companies at the beginning of what hopefully will be a long term upswing,” says Thomas Nadramia, an analyst with Standard & Poor’s.
As housing starts hit 1.2 million “building supply companies should be at least reasonably profitable,” he says. “Some of them could be very profitable.” Investors want to buy into LBM firms now and ride the rising tide of increasing housing starts and economic recovery.
Stock, the ninth-biggest pro-oriented dealer, wants to raise $175 million in an IPO, by cashing in on the nascent recovery while investor appetite is strong and potential investment opportunities remain weak.
But the Raleigh, N.C.-based company has operated in the red since 2007, posting net losses in 2010, 2011, and 2012 totaling $83 million, $54 million, and $36.9 million, respectively. And for the first three months of 2013, the net loss came to $9.2 million.
But, Stock’s net sales grew 25% from $751.7 million in 2010 to $943.4 million in 2012, and 2013’s first-quarter sales of $248.7 million topped the year-earlier quarters by 32.2%.
The company had adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of negative $58 million in 2010, negative $30.8 million on 2011, and a positive EBITDA of nearly $2 million in 2012. The company listed a first quarter 2013 EBITDA of negative $1.22 million compared to negative $7.6 million for the same quarter of 2012.
Adjusted EBITDA often serves as a proxy of business performance. Some observers say Stock’s EBITDA indicates a company moving in the right direction.
Nadramia says LBM firms survived the housing recession by cutting expenses and operations, and can now be profitable at much lower sales volumes. “These companies should have gotten leaner. They should have gotten smarter, and they should be a lot more conservative,” Nadramia says.
Stock may be in a similar position, having pared operations and expenses, while growing sales, setting the stage for profitability, as long as it gains the cash to fund growth. “If they’re properly capitalized, they should be in a good position to grow and make some money,” Nadramia says.
Frank Chambers, a partner with CK Solutions, doesn’t doubt that Stock will be able to put a positive spin on a lackluster balance sheet. “There are a lot of venture capital people out there looking to put money in LBM companies,” Chambers says. “You can spin a story that will look good on paper and get people to invest.”
But Chambers is more interested in Stock’s operational rather than financial strategy.
“If I were an investor, I would want them telling me their long-term strategies for increasing market share,” he says.