With its average of 25% sales growth annually over the last decade, it may be no surprise that insulation specialist Installed Building Products (IBP 1.89%) has seen its total return rise ten-fold over the same time. However, despite this incredible run, IBP's meteoric stock rise paused as the company recently reported a 2% decline in sales in the third quarter.
In the face of a confluence of headwinds, such as rising interest rates slowing the housing market, higher inflation, and lapping 40% sales growth in 2022, IBP's valuation dipped to once-in-a-decade levels as its stock price slid over 10%.
So this begs the question: Is this growth slowdown the new normal -- making a reduced valuation necessary? Or is IBP trading at a temporary discount and now poised to continue beating the market from these friendlier prices?
Here's why I'm thinking it's the latter.
IBP: A quickly growing serial acquirer
With a 30% market share of the residential insulation installation industry, Installed Business Products believes it is the No. 1 or No. 2 competitor in 50% of the markets where it has permits to operate. Thanks to its 240 locations, IBP has quickly grown into a nationwide operation capable of serving all 48 continental states.
IBP has essentially replaced the distributors, wholesalers, retailers, and contractors in the homebuilding value chain by directly connecting the homebuilder with the insulation manufacturer, handling the purchasing, logistics, and installation independently.
However, despite being a significant force in the insulation industry, these sales now only account for 60% of IBP's total revenue, highlighting the company's ambitions to diversify its product base. Down from 74% in 2013, insulation has gradually become a smaller portion of IBP's sales as it added new products like shower doors, shelving, mirrors, garage doors, waterproofing and fireproofing options, gutters, and window blinds.
By utilizing its nationwide network and its access to home construction companies, IBP is steadily adding complementary products that can be sold alongside its core insulation offerings, generating more money for each new house built. To build out this ever-expanding line of end products, IBP has acquired over 180 new companies since 1999, focusing on small, tuck-in style buyouts of already profitable companies. In the last nine years alone, IBP has bought at least six or more businesses annually and aims to obtain $100 million in sales annually through acquisitions.
The cherry on top for investors?
Not only is IBP committed to diversifying and growing through these acquisitions, it is excellent at making them, as demonstrated by its high and rising return on invested capital (ROIC).
IBP's burgeoning profitability and strong shareholder returns
Powered by its shrewd deal-making ability, IBP maintains an 18% ROIC that has consistently been above that of its most similar (and much larger) insulation peer, Owens Corning (the company with the Pink Panther ads).
IBP Return on Invested Capital data by YCharts.
ROIC measures a company's profitability compared to its debt and equity. It's a great metric to gauge the effectiveness of IBP's mergers and acquisitions (M&A) prowess as it quantifies how profitably capital is reinvested. Compared to IBP's current weighted average cost of capital (WACC) of 12%, its 18% ROIC indicates that its acquisitions continue to create excess profits -- all while diversifying the company's product line.
This outsize profitability generates more money for M&A, creating a virtuous cycle if management continues executing effectively. Furthermore, besides funding its M&A ambitions, this profitability allows the company to reward its shareholders through dividends and share buybacks.
With a 1% dividend yield -- along with a special dividend in each of the last two years that moves this figure closer to 2% -- IBP only uses roughly 25% of its net income to fund its growing dividend. Meanwhile, the chart below shows that management isn't afraid to buy back shares when it deems the company's share price too cheap.
Thanks to this three-pronged strategy for spending profits on M&A, dividends, and stock buybacks, IBP looks primed to extend its market-beating ways. However, it will remain absolutely crucial to watch the company's ROIC going forward, to be sure it remains high.
A once-in-a-decade valuation
As disappointing as the company's 2% third-quarter sales decline was, management noted that sales figures in October (the start of their fourth quarter) were record highs. This indicates (perhaps cautiously) that the housing market may have hit a trough for now, and brighter days may be coming for the company in Q4 and 2024.
Furthermore, despite declining sales, the company continued to gain market share in Q3. Consider that in the U.S., single-family houses under construction fell by 16%, while multi-family homes jumped by 14%. By comparison, IBP saw single-family sales only decline by 12%, while its multi-family revenue spiked by 28% -- indicating impressive market share gains despite a brutal macroeconomic environment.
After posting new record-high Q3 figures for net income, earnings per share (EPS), and operating cash flow -- despite not firing on all cylinders -- IBP now trades at a once-in-a-decade valuation.
IBP PE Ratio data by YCharts.
Thanks to this deeply discounted price-to-earnings (P/E) ratio, the company's strong track record of M&A success, and its shareholder-friendly dividends and buybacks, IBP is an excellent stock to add to as the housing market slowly improves with time.