Lakewood Capital Management recently released its Q2 2020 Investor Letter, a copy of which you can download here. In the letter, among other things, the fund reported a net profit of 10.7% for Q2 2020. You should check out Lakewood Capital’s top 5 stock picks for investors to buy right now, which could be the biggest winners of the stock market crash.
In the said letter, Lakewood Capital highlighted a few stocks and HD Supply Holdings Inc. (NASDAQ:HDS) is one of them. HD Supply Holdings Inc. (NASDAQ:HDS) is an industrial distributor. Year-to-date, HD Supply Holdings Inc. (NASDAQ:HDS) stock lost 11.4% and on August 3rd it had a closing price of $35.65. Here is what Lakewood Capital said:
“During the quarter, the fund initiated a position in HD Supply, a leading industrial distributor focused on two separate markets, facilities maintenance and non-residential construction. We believe the upcoming spin-off of its more cyclical, non-residential construction business will highlight the company’s attractive facilities maintenance business, providing significant upside from the stock’s discounted valuation of under 9x last year’s consolidated EBITDA.
HD Supply’s facilities maintenance business, which accounts for over 60% of its EBITDA, is the market leader in distributing maintenance, repair and operations (MRO) products to multifamily, hospitality, healthcare and institutional facilities. This business has historically been very stable, as demand is largely driven by repair needs. Moreover, customers generally need to have these products urgently to complete a job, giving HD Supply a strong competitive advantage as the company offers next-day fulfillment that ecommerce and smaller competitors are unable to match. This attractive competitive positioning and resulting share gains have driven organic revenue growth of about 5% annually since 2013. Recently, investors have focused on the segment’s exposure to the travel market, which has been severely impacted by the COVID pandemic. However, the vast majority of earnings comes from the more insulated multifamily and healthcare markets as hospitality accounts for just 20% of segment sales and has lower-than-average margins. While the overall business was impacted materially in April as even normal maintenance was deferred due to COVID-related restrictions, activity has already begun to normalize, and we would expect this trend to continue throughout the remainder of the year.
HD Supply’s other core business operates under the brand White Cap, providing a onestop solution for non-residential construction products including concrete accessories, safety equipment, tools, building materials and fasteners. White Cap is the largest player in this fragmented market with a high-single digit percentage market share and predominantly competes with smaller “mom and pop” alternatives. Due to its scale, White Cap has significant advantages in the breadth of products it can provide to customers and depth of inventory to ensure on-time delivery, which are both important factors to builders given the significant costs of unutilized labor when waiting on materials. As a standalone company, White Cap will have the ability to pursue its acquisition strategy more aggressively and further consolidate the market. Buying smaller companies, extracting synergies and leveraging its superior purchasing power should prove to be a powerful driver of White Cap’s future financial performance.
Following the spin-off of White Cap (which should occur later this year or early next year), we believe that each individual business should eventually trade at better multiples than the market currently applies to the consolidated company today. We believe the stability, attractive growth profile and high returns on capital of the facilities maintenance business will hold broad investor appeal and should garner a multiple of 12.5x EBITDA (a slight discount to Grainger, an industrial MRO business). We value White Cap at 9x EBITDA, which is in line with other more cyclical distributors. In sum, this equates to an 11x blended EBITDA multiple, resulting in a price of almost $60 per share, around 65% above current levels.”
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In Q1 2020, the number of bullish hedge fund positions on HD Supply Holdings Inc. (NASDAQ:HDS) stock increased by about 5% from the previous quarter (see the chart here), so a number of other hedge fund managers seem to agree with HD Supply’s growth potential. Our calculations showed that HD Supply Holdings Inc. (NASDAQ:HDS) isn’t ranked among the 30 most popular stocks among hedge funds.
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Video: Top 5 Stocks Among Hedge Funds
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Disclosure: None. This article is originally published at Insider Monkey.
