GMS Inc. Posts Strong Results As The Housing Backlog Drives Earnings

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rong>-GMS beat earnings estimates by 12%, with earnings-per-share (EPS) coming in at $2.09.

-Net came in at $1.288 billion, an increase of 38% y-o-y.

-Backlogs continue to provide support to demand.

GMS Inc. NYSE: GMS is a leading distributor of construction products and provides commercial and residential building supplies. GMS posted record revenue, EBITDA, and net income for the quarter on the back of strong demand for building supplies. Strong residential demand continued to drive demand for materials as revenue increased by 38% for the year, and gross margins came in at 40%. The company recorded a revenue growth of 20% for its core products, wallboard and ceilings. Meanwhile, complementary products witnessed a 28% increase y-o-y, as both volume and price drove revenue higher. The company also continued to acquire additional distributors during the quarter, investing around $350 million. Despite inflationary pressures affecting both supply chains and expenses, the company managed to lower SG&A costs, thereby improving EBITDA by 250 basis points for the quarter. A strong earnings result, meant that the stock was up 6%, and investors may just be willing to take a second-look at the GMS, should it continue to post similar results moving forward.

Business outlook

Although the housing market is starting to cool, management continues to foresee strong demand for the next few quarters, as housing supply remains tight. Commercial demand continues to be soft as work from home, and an economic slowdown weighs on demand for commercial property. Despite issues currently facing the real-estate market, volumes increased across all four of the company's product categories.

GMS' management continues to focus on improving distribution in order to drive future sales, along with expanding internationally. These two strategies continue to bear fruit, and unless there is a major reversal in demand, revenue growth should remain consistent in the coming quarters. But issues remain, as housing starts have started to cool down recently, with mortgage rates hitting multi-decade highs. The total number of housing starts fell by 5% to a a 13-month-low, coming in at 1.048 million y-o-y.

Wallboard prices going up by 400% has played a big role in the record growth, and while lumber prices have retreated recently, they may fall further as housing demand softens. This could, in turn, affect revenue during the next couple of quarters. Wallboard revenue increased by 30% during the quarter, and if headwinds continue, that growth could slow down to low double-digits. Despite the macroeconomic concerns, management expects that the backlog of single-family homes should continue to drive revenue and expects demand for its products to remain robust as we advance through the year. Additionally, GMS continues to increase the number of greenfield yards and service centers, with 13 new facilities coming online during the quarter. Management has guided that it will continue to focus on increasing these facilities through the year and is focused on a multi-year strategy, rather than short-term gains.

But, a lack of investor conviction continues to reflect in the company’s valuation, which remains relatively inexpensive, as uncertainties stemming from the housing market continue to weigh on sentiment. The architecture billing index or ABI once again turned positive in May, which the management believes could be a turning point. Still, investors will remain cautious and have taken wait and watch approach, as more data comes in. On the other hand, positives such as a high number of people renting and multi-family demand could help soften any future downturn. It should be noted, that management has indicated pricing power depends on the extent to which any decline might occur.

Financial outlook and valuation

Revenue is estimated to come in at $4.5-4.6 billion for the year; with the slowdown, revenue could fall to $4.3 billion in 2023. Meanwhile, net profit is expected to come in the range of $250-275 million. Valuation continues to be relatively inexpensive and the stock currently trades at around 7-8x 2023 earnings. Also, management has worked diligently to reduce its net-debt leverage, which it expects to fall to 1.8x at the end of 2022. The total debt remained at $1.8 billion, with the current ratio at a healthy 2.3. Cash remains a concern, with cash on hand at $83 million, and although the company has a revolving credit facility, management needs to shore up its cash reserves to overcome a potential slowdown that may occur in the future.

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