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Why GMS Inc. Stock Just Popped 10%

By Rich Smith – Apr 5, 2018 at 3:53PM

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GMS is taking Canada by storm.

What happened

Shares of U.S. wallboard and suspended ceilings systems distributor GMS Inc (GMS -2.36%) popped 13% in early trading Thursday and remained up 10.2% as of 2:40 p.m. EDT after announcing a large acquisition in America's neighbor to the north.

So what

As announced earlier this morning, GMS has agreed to acquire 100% of the equity of Canada's largest wallboard distributor, WSB Titan, in a deal valued at $627 million. Commenting on the acquisition, GMS CEO Mike Callahan noted: "The acquisition of Titan further extends our leadership position as the largest wallboard distributor in North America with significant scale advantages and a well-balanced portfolio built for growth." In addition to being America's largest drywall distributor, GMS now will hold that title in Canada, as well -- and accordingly in North America as a whole.

The deal also will lend GMS a bit of geographic diversity. Up until now, the company had derived more than 99% of its revenues from just one country -- ours. Going forward, WSB Titan's $459 million in annual revenues will constitute 16.5% of total sales at the combined company.

Drywall in a house under construction.

Rarely does drywall cause this much excitement. Image source: Getty Images.

Now what

Investors seem pleased with this prospect. They should also be pleased with the price GMS is getting. According to management, the $627 million that GMS will pay to acquire WSB Titan works out to a valuation of about eight times earnings before interest, taxes, depreciation, and amortization (EBITDA). That's a considerable discount to the nearly 10 times EBITDA valuation that GMS' own shares command -- indicating that GMS has snagged itself a bargain.

Investors are right to be bidding this one up.

Rich Smith 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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