Whether investors flock to Stock Building Supply’s initial public offering (IPO), announced June 14, depends largely on whether the company can turn attention away from its continuing losses over the past three years and more toward the potential upside reflected in strong sales growth.
The nation's ninth-biggest pro-oriented building material dealer wants the focus to be sales growth, not losses, which totaled nearly $37 million in 2012, and $183 million in the past three years. Industry observers offer sharply divergent opinions on the viability of Stock’s IPO, based largely on which set of metrics, such as income or losses, sales growth, or even EBITDA (earnings before interest, taxes, depreciation, and amortization) used to measure the company’s future viability.
The Raleigh, N.C.-based company hopes to raise as much as $175 million in an IPO, cashing in on the U.S. housing industry’s nascent recovery while investor appetite is strong and potential investment opportunities remain weak. Stock would join other firms, such as Boise Cascade and Ply Gem, that have gone public to strong demand. But as one industry observer commented, “Who buys stock in a company that seven years after the initial downturn still loses money after securing every advantage of a bankruptcy filing?”
After its acquisition by Gores Building Holdings in 2009, Stock filed for Chapter 11 bankruptcy reorganization in an effort to get out of long-term leases in locations it had abandoned during a retrenchment as the housing market crumbled.
According to the Stock’s Form S-1 filing, the company has operated in the red for years. Net losses in 2010, 2011, and 2012 totaled $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.
However, the company’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%. "In 2006, our current blueprint of facilities generated approximately $1.8 billion in sales, and we believe that we will achieve attractive growth as our markets recover to normalized levels of new home construction," the company said.
But one LBM industry rep noted that Gores has, no doubt, done everything it can to turn the company around and produce a profit but has exhausted its own cash as well as that of its credit sources. Currently, the stock market offers the best chance of infusing additional cash to keep the company afloat, but that window may close if the market sours by year’s end.
“If there was no pressure to turn cash they would have waited,” an industry source says. “With BFS [Builders FirstSource] already in the market bleeding red ink, I am not sure how many bottom-feeding investors will have an appetite to chew on this.”
Yet, even though losses have continued, Paul Hylbert, chairman and CEO of Kodiak Building Partners in Greenwood, Colo., and former president of ProBuild, points to a trend of rising EBITDA at Stock over the past three years.
According to Stock's SEC filing, the company had adjusted EBITDA 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 serves as a proxy of business performance, but is not required by generally accepted accounting principles (GAAP) in the U.S. Some view EBITDA as a way to measure financial and business trends affecting a company’s financial condition and operating results.
“Stock should be able to produce somewhere in the area of 5% to 7% EBITDA as this recovery continues,” Hylbert says. “Their EBITDA was essentially breakeven last year, and my guess is they’re going to make 3% in 2013.”
Other factors in Stock’s favor, according to Hylbert, include the strength of the housing recovery in markets the company serves, as well as its relationships with big builders who themselves are positioned favorably in those growing markets.
“I see a company that has under-utilized assets,” he says. “We’re at about a million [housing] starts now and sustainable demand is somewhere between 1.6 million and 1.8 million. So as the market recovers, they’ll not have to invest in facilities, and from a volume standpoint, they’re going to do a whole lot better.”
Still other industry observers remain less sanguine with the IPO's prospects.
“The numbers look so bad and with their previous track record, I wouldn't be surprised this IPO doesn't happen,” one says. “This is not like it is a new company with fresh ideas with a good history and great trend. I give the chance of the IPO happening at less than 50%.”
Another industry observer notes that it’s no surprise Stock would highlight its size and market position as advantages —“the same unworkable story.”
"The truth is, the independent dealers continue to survive, and as a group outlast the national retailers, because they provide the most efficient way to supply the home building industry,” he says.
“When Stock, BFS, and ProBuild chase profits rather than sales, as market leaders they will pull up margins for the entire industry segment,” he says. “Think about it, the three market leaders are continuing to bleed cash, while, I would bet, as a whole independents have returned to being profitable.”
“One model, using other peoples' money is sales driven,” he says. “The other, using their own money is profit driven. The IPO is just a different source of other people's money.”