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Why BlueLinx Holdings Inc.'s Stock Is Rocketing Today

By Matthew DiLallo – Mar 13, 2018 at 11:41AM

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The building products wholesale distributor is making a needle-moving deal.

What happened

Shares of BlueLinx Holdings Inc. (BXC 0.41%) jumped on Tuesday, rising more than 18% at 10:45 a.m. EDT, after the company agreed to buy privately held Cedar Creek.

So what

BlueLinx Holdings announced that it agreed to acquire Cedar Creek from Charlesbank Capital Partners for $413 million, which includes $345 million in cash and $68 million in value from capital leases. Cedar Creek, which is a leading building-product wholesale distributor, will enhance BlueLinx's product offerings, capabilities, and geographic reach.

People in suits shaking hands, with digital arrows pointing upward superimposed on top.

Image source: Getty Images.

The deal will also be significantly and immediately accretive to earnings, and should continue adding to the bottom line over the next 18 months as BlueLinx captures an estimated $50 million in annual cost savings. Further, the added scale positions the combined company for accelerated growth in the coming years, especially as the housing market continues improving.

Now what

The driver of this deal is that the two companies can capture significant cost savings through their increased scale. For perspective, Cedar Creek generated $60 million in earnings last year but could see that number climb to $110 million by combining with BlueLinx. And because it's tacking on a boatload of new debt to complete this deal, a lot is riding on BlueLinx to quickly capture these cost savings. If it falls short, or the housing market stalls, shares could give back today's gains quickly. Alternatively, investors might want to consider these lower risk housing-related stocks instead.

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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