We came across a bullish thesis on TopBuild Corp. (BLD) on Substack by Kairos Research. In this article, we will summarize the bulls’ thesis on BLD. TopBuild Corp. (BLD)’s share was trading at $310.34 as of Feb 25th. BLD’s trailing and forward P/E were 15.30 and 14.29 respectively according to Yahoo Finance.
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TopBuild is a dominant player in the insulation industry, consolidating a fragmented market while executing a disciplined growth strategy. Despite the stock trading near 52-week lows due to a slowdown in housing starts, long-term trends remain intact, as the housing supply must increase to meet demographic needs. Market pessimism has created an opportunity for investors willing to take a longer-term view, as TopBuild has historically compounded at 31% annually since its 2015 spin-off from Masco, significantly outperforming the broader market.
The company operates across residential, commercial, and industrial insulation markets, commanding a 30% share in residential installation and 10% in distribution, with similar penetration in commercial and mechanical insulation. Despite its strong presence, there remains significant room for growth, particularly in commercial and mechanical segments. A key driver of its expansion has been acquisitions, with $2.4 billion allocated between 2019 and 2023, 63% of which was directed toward acquisitions. Management has demonstrated an ability to integrate targets effectively, as seen in the 2021 Distribution International acquisition, where EBITDA margins expanded from 10% to 17.7%, yielding $35–$40 million in cost savings. TopBuild typically acquires businesses at 5x–6x EBITDA, which falls to 3x–4x post-synergies, making acquisitions highly accretive. Over the past eight years, the company has completed 45 acquisitions, including eight in 2024 alone.
TopBuild’s business is split between installation and distribution, with installation offering higher margins. The company serves national and regional homebuilders, as well as local contractors and industrial customers. Customer concentration is relatively low, with the top 10 customers accounting for just 11% of revenue. Since its IPO, TopBuild has grown adjusted EBITDA from $100 million to $1 billion, a 29% CAGR, while EPS and free cash flow per share have grown even faster, at 55% and 31% CAGR, respectively. Its ability to generate high returns on capital has been a key factor in its long-term success.
Capital allocation has been highly shareholder-friendly, with aggressive buybacks complementing acquisitions. In 2024, the company repurchased 2.5 million shares for $966 million, with over 40% of these occurring in Q3 and Q4 as the stock declined. Management remains opportunistic, with $1.2 billion authorized for future repurchases, representing 13% of the market cap, likely to be executed within the next two years. With a trailing twelve-month free cash flow of nearly $700 million and capex at just 1.3% of revenue, the company has significant financial flexibility. Its balance sheet is conservative, with net debt at just 1.3x EBITDA or 1.9x operating cash flow, ensuring stability even during downturns.
TopBuild’s current valuation, with a 7.8% free cash flow yield, reflects short-term cyclical concerns rather than structural weaknesses. The company is well-positioned to benefit from a housing market rebound, given its consolidation strategy, operational efficiencies, and shareholder-friendly capital allocation. CEO Robert Buck, who has been with TopBuild since its spin-off and took over as CEO in 2021, has overseen its disciplined growth strategy. His personal stake, worth $13.7 million, aligns his interests with shareholders, though overall executive and director ownership remains below 1%. His compensation is tied to key metrics such as operating margins, working capital efficiency, safety, EPS, and relative total shareholder return, ensuring a focus on long-term value creation.
Despite strong execution, risks remain. The company is exposed to the cyclical nature of the housing market, though it is diversifying into industrial and commercial segments to mitigate volatility. Customer concentration, while moderate, could pose challenges if key clients shift business to competitors like Installed Building Products. However, TopBuild’s valuation assumptions take a balanced approach, with revenue growth projected at 6%–12%, below its historical average of 14%, and pretax margins estimated at 14%–16%. The company’s share repurchase program is expected to reduce shares outstanding by 10.5% through a $1.2 billion buyback, further driving earnings growth. A reasonable valuation multiple between 15x and 20x implies a base case price target of $588.6 by 2030.
If management successfully expands margins beyond expectations or executes high-value acquisitions, the company could exceed its projected growth trajectory. While immediate margin breakthroughs may not be certain, TopBuild’s combination of strategic acquisitions, share repurchases, and strong underlying business fundamentals makes it a compelling long-term investment.
TopBuild Corp. (BLD) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 39 hedge fund portfolios held BLD at the end of the third quarter which was 39 in the previous quarter. While we acknowledge the risk and potential of BLD as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than BLD but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.