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This Lesser-Known Industrial Products Company is Red-Hot -- Will it Continue?

By Brian Bent – Oct 22, 2021 at 7:33AM

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The wholesale distributor has fared well in the housing boom -- but will it last?

BlueLinx Holdings (BXC 1.96%) is a wholesale distributor of materials for residential and commercial construction projects that is certainly benefiting from the housing boom. Due to the nature of its business, the company's fortunes are tied indirectly to the supply and demand dynamics in the housing market. Bluelinx provides the materials homebuilders use to construct and renovate real estate and in some ways, it has been viewed as a proxy for the real estate market.

Shareholders have watched this stock soar since mid-2020 due to the housing shortage that has pushed home prices to record levels. In fact, shares are up nearly 100% over the past year and more than 500% over the past five years.

Material suppliers like Bluelinx have been hot on investors' lips lately because of the recent spike that caused lumber prices to hike more than 1000% due to supply shortages and surging demand. This stellar move along with wider commodity price hikes drove a record quarterly performance that saw net sales of $1.3 billion, an 87% improvement, record net income, and a gross margin at a stellar 19.2%. The recent performances have put the company in a strong liquidity position and the company has already expressed interest in bolstering its M&A capabilities and reducing debt. 

Two construction workers carrying a beam.

Source: Getty Images.

Bluelinx's Pandemic Recovery

The pandemic softened demand for housing and housing-related products in the first half of 2020 which had a pronounced negative on Bluelinx's core business. As a result, the stock was trading as low as $3.65 per share. The company has since turned a corner and the future looks much better now. Despite supply chain concerns, the company is benefiting from pent-up demand from the pandemic and unprecedented accommodative fiscal and monetary policy. According to Bluelinx, the demand for new homes in 2021 has been more than 12% higher than the 50-year average. 

Chart from Bluelinx presentation

Source: Bluelinx 

The company expects the elevated demand to persist over the next few years, a view which I have reservations about. There are, however, strong signs that the elevated demand will persist over the short term. 

Building permits and new construction starts have increased and housing prices are starting to exhibit their traditional seasonal behavior which is a great sign. The market is returning to some version of normal as we exit the pandemic. All signs point to the continuation of the recovery as the market adjusts to elevated demand.

Graphs from Bluelinx presentation

Source: Bluelinx 

Builder confidence remains at a 20 year high which bodes well for suppliers like Bluelinx. Investors should pay attention to these figures closely and watch for any falloff or signs of trouble.

Commodity and Material Risk

Despite inflation, home builders are thriving in the hottest housing market in years. As a result, we are seeing heightened investor attention on basic materials in the housing industry. While there are concerns about another commodity spike in the short term, the sustained demand suggests that companies should be able to continue to pass those costs along to consumers comfortably. 

Bluelinx has so far benefited from the upward trend in commodity prices, but there is a risk of deflation, especially with the Fed suggesting that there will be a pause on accommodative monetary policy over the next year . For distributors, this can be quite risky as it could force them to take a loss on the inventory they've been holding. Bluelinx is aware of this risk and manages inventory levels judiciously . The trade-off is that the company may sacrifice sales volume to stock lightly, but it is a prudent decision.

The Takeaway

Bluelinx is not the most glamorous stock out there. What it offers investors is access to a hot industry in a broad indirect way. The stock is at the high end of its range right now, but it deserves to be. The company is in a great sequence right now and growth may not be as transitory as the market has suggested. With a P/S ratio of just 0.123, and all signs pointing to sustained elevated revenue, investors can feel pretty good about parking their money here over the next few years. I am a huge fan of the way the company does business and I am watching the M&A initiatives closely. Bluelinx is a great pick for any investor looking to participate in the real estate boom.

Brian Bent owns shares of Bluelinx. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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