Bluelinx: Knock on Wood

After a short pullback in the fall, lumber prices resumed their insane run higher.

If you’re building a house, you might want to opt for a cave. A lot less construction material.

But for most of us, we’re stuck with paying exorbitant lumber prices.

That’s good news for Bluelinx Holdings (BXC).

The thing is, Bluelinx isn’t a lumber mill. It’s a wood products distributor.

However, since it keeps its margins fixed in terms of markups, higher lumber prices translate into higher profits.

So how did we come across this cheap lumber play?

Our search for value and growth through our proprietary data pointed us to building products. We had already written about a lumber mill in a recent article of The Spill. 

But we hadn’t thought about a wood products distributor.

And that caught our attention. 

That and it was the 3rd highest search by financial pros amongst building products this past month.

When we compared it to peers in the industry, only Builders FirstSource, Inc. showed similar growth and valuation measures.

Which is why we’ll be covering that in our next issue!

But for today, let’s start with Bluelinx Holdings.

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Bluelinx Holdings Business

BlueLinx Holdings Inc., together with its subsidiaries, distributes residential and commercial building products in the United States. 

The company distributes specialty products comprising engineered wood, industrial products, cedar, molding, siding, metal, and insulation products; and structural products include lumber, plywood, oriented strand boards, rebars and remesh, spruce, and other wood products primarily that are used for structural support in construction projects. 

It also provides various value-added services and solutions to customers and suppliers. 

The company serves dealers, specialty distributors, national home centers, and manufactured housing customers through a network of distribution centers.

What makes them different from sawmills is they only act as wholesalers. Generally speaking, that keeps their margins pretty steady.

The company’s revenue is split into two categories: structural (41.1% of sales) and specialty products (58.9% of sales).

Over the past several years, Bluelinx has been moving more towards specialty products given the higher margins and lower variability in demand and cost.

Financials

Corporate revenues skyrocketed along with margins in the last two years as elevated lumber prices drove earnings and cash flows to their highest levels in years.

Given the heavy demand for housing and low inventory, prices for structural and specialty lumber is expected to remain at record levels for the next several quarters if not into next year.

We love Bluelinx’s balance sheet with just under $1 billion in total liabilities and approximately the same amount in current assets, that leaves their non-current assets of $372 as straight value for shareholders, or roughly $2.84 per share.

Valuation

BXC’s valuation is a stunning 3.03x TTM earnings and 4.57x forward earnings, not to mention a TTM price to cash flow of 6.09x and price to sales TTM of 0.20x.

The only company that comes close is Builders Firstsource (BLDR). Yet, its valuation measures are still slightly higher.

However, Builders Firstsource has better overall margins.

This is largely driven by the different business models, BXC being a wholesaler and BLDR acting as a manufacturer.

Consequently, that’s also why BLDR looks better when we compare the growth metrics, especially the forward looking measures.

Our Opinion – 8/10

Bluelinx Holdings is in a fantastic position to capitalize on the tight construction market. 

And not being a manufacturer gives them a little more buffer if lumber prices contract. However, that limits their growth as well.

Shares have run higher the past few weeks. We’d like to see a pullback closer to $70 per share to take a position. 

Otherwise, we like this stock over the next 12-18 months.