BlueLinx Holdings Case Study – How We Nailed Attractive Entry Point In Shares of This Building Supply Company

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BlueLinx Holdings Case Study – How We Nailed Attractive Entry Point In Shares of This Building Supply Company

Bluelinx Holdings Inc. (NYSE:BXC) is a leading distributor of building and industrial products in the US.  We started tracking the company in late 2016 as an asset sale put them ahead of schedule in their restructuring efforts.  We disclosed our long position on August 4th, 2016 as we internally calculated an EPS number that was much higher than the company reported in its Q2 financial report:

You can learn more about how we exploit differences between company reported EPS (GAAP) and a more operational EPS (non-GAAP) that dictates the true earnings power of a company here.

We later put out a series of updates on BXC for our Premium Members while the stock continued a largely sideways to slightly upward trend, even adding it to a few of our contrarian model portfolios designed to take advantage of pullbacks and/or muted reactions to news that we feel at times is misunderstood.  These portfolios are fittingly named “Pullback Portfolios”.

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Major Legacy Shareholder Sells Stake Through Underwriter at Big Discount: Made for Attractive Entry Point

During our due diligence process, we learned that Private Equity firm Cerberus Capital was a long-time investor in the company. Cerberus’ overhang in the stock suppressed the stock price but speculated they would look for an exit soon. In September 2017, we observed weakness in the stock, and anticipated that Cerberus would soon try to sell its stake because Cerberus’ fund, which invested in BXC, was winding down. The shares were sold in a non-dilutive secondary offering through an underwriter, BTIG LLC, at $7.00 per share. No new shares were issued. Cerberus just opted to sell its stake through an underwriter.

Not only was there an opportunity to get a great return on a sizable number of shares in a trade, but we also believe opportunities like this can enable investors to build sizable positions in quality companies to hold longer term. BXC stock never reached the offering level price of $7.00 in open market trading.

Below represents the chronology of events and research leading up to the company’s March 12, 2018 announcement that it “entered into a strategic merger agreement to acquire Cedar Creek.”

Bluelinx Coverage

Monday, June 27, 2016

BXC ($7.20) – We are considering constructing Reasons for Tracking on Bluelinx Holdings.  BXC distributes building products in North America. The company distributes products in two principal categories, structural products and specialty products. This $7.20 company is taking steps to improve margins and reduce its mountain of debt. If successful, there could be massive incremental gains in  EPS and EBITDA. We encourage our members to review the company’s conference call transcripts for more information while we continue our research.

Thursday, August 4, 2016

BXC ($7.34) – On June 27, 2016 we stated we are watching BXC closely due to the  company taking steps to improve margins and reduce its mountain of debt. If successful, there could be massive incremental gains in  EPS and EBITDA.

This morning, BXC reported Q2 2016 results and more importantly reported progress on debt reduction plans:

  • Sales of $509.0 million vs $515.6 million in the prior year
  • Non GAAP EPS of $0.43 vs $0.08 in the prior year

Quotes from management:

“As previously announced on April 21st, our primary focus is on deleveraging the balance sheet. We have decreased our debt principal by $63.6 million and our net working capital by $64.5 million when compared to the same period a year ago primarily through our inventory and facility rationalization. In addition, we are currently under contract to sell several of our closed facilities and are actively marketing certain operating facilities for sale leaseback opportunities.”

Monday, August 22, 2016

Will Look To Add to Our Long Position In BXC

BXC ($8.73) –  In our June 27, 2016 morning premium member email we stated we were taking closer look at BXC due to recent steps to improve margins and reduce its mountain of debt.  On August 4, 2016, BXC reported strong Q2 2016 results showing that the steps they are taking are beginning to pay off.  We disclosed our long position on August 4th.

Further due diligence strengthens our bullish assumptions on the BXC story.  More details to come.

Thursday, September 1, 2016

BXC ($8.87) announced it has completed the sale of 3 facilities for net proceeds of ~$1.9 million.  The Company also announced it has 6 other non-operating facilities under contract which will generate ~$30 million in net proceeds by year end which it intends to use to pay down its debt burden which we discussed in our original note from June 27, 2016.

If the Company uses the full $30 million to pay down its debt, we calculate the interest savings to add ~$0.20 (non-taxed) EPS on an annual basis.  We used non-taxed for our calculations because the Company has a large amount of NOL’s ($267 million) that should shelter the tax burden for a prolonged period.

We initiated our long position on August 4, 2016 on the heels of BXC’s strong Q2 2016 results.  See earnings recap here.

Friday, September 9, 2016 Email – BXC Information Arbitrage

Today we have published two articles, one on Bluelinx Holdings Inc. (NYSE:BXC), and the other on [premium only].  We have covered both stocks in recent research, releasing a “Reasons For Tracking” analysis on [premium only], and mentioning BXC as a compelling case based on potential margin improvements and company actions to reduce its mountain of debt.

You can read our articles at the following links:

We are long BXC.

Thursday, November 10, 2016

BXC ($7.59) reported Q3 2016 results:

  • Sales of $476 million vs $517.8 million in the prior year
  • Non-GAAP sales of $469.7 million vs $453.2 million in the prior year
  • Non-GAAP EPS of $0.14 vs $0.07 in the prior year

Quotes from management:

“Our performance this quarter confirms that we continue to make good progress on our key strategic initiatives of monetizing our real estate and deleveraging the balance sheet. We have successfully extended our asset-based credit facility, prudently managed our working capital, and sold several of our unoccupied facilities which have enabled us to significantly reduce our debt from 2015 third quarter levels. In addition, we continue to focus on our customers through our local market emphasis as we improve our operational efficiencies and bottom line,” said Mitch Lewis, President and Chief Executive Officer.

We are still trying to determine what the sales and EPS run rate will be once restructuring initiatives are complete.  We will be on the conference call later this morning to see if management provides color on this and on its industry outlook (housing starts)

Thursday, March 2, 2017

BXC ($6.90)reported Q4 2016 results:

  • Sales of $421.7 million vs $428.2 million in the prior year
  • Non-GAAP loss per share of $0.27 vs loss of $0.87 in the prior year

Management stated:

“We are pleased to share the strong finish we had in 2016 which demonstrates our continued focus on our key strategic initiative to deliver the Company through monetizing our real estate and improving our working capital. The successful execution of this strategy enabled us to improve our financial performance while significantly reducing our debt from prior year levels.  We continue to evaluate alternatives to reduce the Company’s leverage and enhance liquidity,” said Mitch Lewis, President and Chief Executive Officer.

Susan O’Farrell, Senior Vice President and Chief Financial Officer added, “Since announcing our deleveraging plan, we have sold eight unoccupied properties during fiscal 2016, which generated gross proceeds of $36.4 million. Furthermore, we have successfully reduced our debt principal by $84.0 million from this time a year ago.

We were hoping the company could maintain profitability even in its seasonally weaker quarters (Q4 and Q1), but it appears for the time being (until gross margins and operating margins improve), the company will have to drive higher revenues and/or continue to reduce its debt.  Fortunately, these are two important goals the company has set for 2017.  Until the company’s restructuring efforts are fully completed, it looks like adjusted EBITDA growth will be the valuation metric we use.

Monday, March 20, 2017

BXC ($8.28) shares have been trending up the past week in sympathy with some other building supply stocks like Huttig Building Products, Inc. (NASDAQ:HBP), which hit a new high on Thursday.  We initiated our long position in BXC on August 4, 2016 on the heels of strong Q2 2016 results and restructuring efforts playing out (shares opened at $7.50 on Aug 4th).  See our initial recap here.  It’s been a bit of a roller coaster ride.  Shares reached a new 52 week high of $9.70 just days after our original note, then retraced to the sub $7 level before beginning this recent uptrend.

Friday, March 24, 2017

BXC ($7.88) completed the sale of 3 properties, stating the following:

“With these property sales and all others incurred since April 2016, BlueLinx will fully satisfy its July 2017 CMBS mortgage payment obligation of $60 million three months ahead of schedule.

Less than a year ago we announced our initiative to reduce the Company’s financial leverage and are delighted to share that we continue to successfully execute on our strategy to deleverage BlueLinx. We are exploring additional sale and leaseback transactions, alternative refinancing options as well as other real estate optimization strategies to continue to improve the Company’s leverage and financial strength,” said Mitch Lewis, President and Chief Executive Officer.

Susan O’Farrell, Senior Vice President and Chief Financial Officer added, “We are thrilled with the property sales we completed in the first quarter of 2017, enabling us to satisfy our July 2017 mortgage obligation ahead of schedule. The substantial remaining real estate portfolio value, which is well above our outstanding mortgage, should enable us to continue to deleverage our balance sheet, while providing us with potential future opportunities to extract that value for the benefit of our growth strategies.”

As we stated in our March 20, 2017 update, we initiated our long position in BXC on August 4, 2016 on the heels of strong Q2 2016 results and restructuring efforts playing out (shares opened at $7.50 on Aug 4th).  See our initial recap here.  The stock has been on a bit of a roller coaster ride.  Shares reached a new 52 week high of $9.70 just days after our original note, then retraced to the sub $7 level before beginning this recent uptrend.

Wednesday, April 26, 2017

BXC ($10.33) shares have been strong the last several weeks, reaching a new 52 week high of $10.46 on April 24, 2017.  We initiated our long position in BXC on August 4, 2016 on the heels of strong Q2 2016 results and restructuring efforts playing out (shares opened at $7.50 on Aug 4th).  See our initial recap here.  The stock has been on a bit of a roller coaster ride since, dipping to the low $6 level before regaining its footing and now hitting new highs.

An added caveat that we have been tracking is that Cerberus Capital, a household name in the private equity industry, still holds a 52% position in BXC. Cerberus will eventually liquidate this position and we are watching closely how minority shareholders will be treated.

We are no strangers to Cerberus Capital. In a similar ownership situation involving Blue Bird Corporation (NASDAQ:BLBD), we spoke out in a Barron’s interview about what we perceived as a bad deal for shareholders. The fact that the bad deal was refused, and the stock is now trading near all time highs, gives us more confidence that the ownership situation in BXC can be resolved.

Friday, May 5, 2017

BXC ($9.23) – Yesterday we highlighted BXC’s Q1 2017 results.  Shares traded down nearly 12% on the results.  We encourage investors to read the conference call transcript as the Company discusses the positive business trends it is seeing:

“The first quarter of 2017 continues the positive trend we’ve enjoyed now for almost two years. And yet the BlueLinx team remains motivated by the tremendous opportunities that lie ahead for our organization or improving but we have a long way to go…

…there were a couple of things going on in the first quarter this year while the winter across the country obviously was generally mild, for us we have a good strong presence for example in New England in the Buffalo market in that area of the country which relative to a very mild 2015 was worse.We’re starting to see significantly improved performance relative to the first quarter in those areas of the country.”

Tuesday, October 10, 2017

BXC ($10.27) a leading distributor of building and industrial products in the United States, announced that Cerberus Capital Management has commenced a secondary offering of 3,863,850 shares of BXC common stock.

We initially discussed our bullish thesis on BXC as a restructuring play in June 2016.  We initiated our long position in BXC on August 4, 2016 on the heels of strong Q2 2016 results and restructuring efforts playing out (shares opened at $7.50 on Aug 4th).  One caveat we had mentioned in our early note was that Cerberus Capital, a household name in the private equity industry, held a 52% position in BXC.  We stated, Cerberus will eventually liquidate this position and we are watching closely how minority shareholders will be treated.

We will look to see what the offering is priced at in the coming days.

Thursday, October 19, 2017

**Buy On Pullback Mock Portfolio Updates

We have added Bluelinx Holdings Inc. (NYSE:BXC) ($8.11) to our Buy on Pullback Mock Portfolio 6.0.  It joins [premium], [premim], and Eastern Company (the) (NASDAQ:EML).  Yesterday during the trading day, we issued the following premium Tweet:

The Company’s shares have been under pressure after announcing a secondary offering on October 10, 2017.  At that time, we stated we were considering adding BXC to our Mock Portfolio 6.0 once the offering was priced. Yesterday after the close, BXC announced the pricing of the offering at $7.00.  While this is a much steeper discount than we initially anticipated, investors should note that this is a non-dilutive secondary with Cerberus Capital Management, a private equity fund who owns roughly 50% of the shares outstanding.   In our April 26, 2017 research note we stated shares of BXC had attained a new high of $10.46.  Commentary in our note also included:

“A caveat that we have been tracking is that Cerberus Capital, a household name in the private equity industry, still holds a 52% position in BXC. Cerberus will eventually liquidate this position and we are watching closely how minority shareholders will be treated.

We are no strangers to Cerberus Capital. In a similar ownership situation involving Blue Bird Corporation (NASDAQ:BLBD), we spoke out in a Barron’s interview about what we perceived as a bad deal for shareholders. The fact that the bad deal was refused, and the stock is now trading near all time highs, gives us more confidence that the ownership situation in BXC can be resolved.”

While this is certainly a temporary setback, with no fundamental change in the business, we feel shares should recover and possibly reach new highs in time, similar to BLBD.

Thursday, November 2, 2017

Bluelinx Holdings Inc. (NYSE:BXC) ($8.82; market cap $80.2m), a leading distributor of building and industrial products, announced its Q3 2017 results:

  • Sales of $479.3 million vs $476.0 million in the prior year
  • Non-GAAP EPS of $0.65 vs $0.12 in the prior year
  • Adjusted EBITDA of $14.0 million vs $10.6 million in the prior year

Quotes from management:

“We are pleased to report continued improvement in our financial performance from the second quarter of 2017 which resulted in increased net income for the third quarter and our highest third quarter Adjusted EBITDA since 2007. These results, coupled with the new five year revolving credit facility that we closed on October 10, 2017, and the successful completion of our secondary offering last week, provide an inflection point for BlueLinx as we move forward into the next phase of our recovery,”

On October 19, 2017 we added BXC to our Buy on Pullback Mock Portfolio 6.0 as we felt the share sell off based on the non-dilutive financing was overdone.  BXC is also part of our Buy on Pullback Mock Portfolio 3.0 since October 2016.

Thursday, March 1, 2018

Bluelinx Holdings (NYSE:BXC) ($15.12; $137.5M market cap), a building supply company, announced Q4 2017 results:

  • Sales of $433.6 million vs $421.6 million in the prior year
  • Non-GAAP EPS of $0.27 vs a non-GAAP net loss of $0.27 in the prior year

Quotes from management:

We are pleased to share our 2017 results, including our best full year gross margin and net income on record and our best full year Adjusted EBITDA since 2006. These results, coupled with the four sale-leaseback transactions we completed on January 10, 2018, position us well to capitalize on our anticipated continued strength in the markets we serve,” said Mitch Lewis, President and Chief Executive Officer.

Susan O’Farrell, Senior Vice President and Chief Financial Officer added, “2017 was exceptional for BlueLinx. Our continued focus on deleveraging the business led to one of the best years in Company history as we improved our financial results and significantly reduced our debt.”

With the majority of cost restructuring initiatives behind them, BXC has now reported two straight quarters of top and bottom line improvements and seems well-positioned to continue this trend in 2018.

We initially took our position in BXC in August of 2016 when the stock was trading at ~$8.00.  BXC has been part of our “Buy on Pullback Mock” Portfolio 3.0 since October 2016.  On October 19, 2017 we also added BXC to our “Buy on Pullback” Mock Portfolio 6.0 on a selloff that was based on the non-dilutive financing.

Friday, March 2, 2018

Bluelinx Holdings (NYSE:BXC) ($16.12; $146.6M market cap), a building supply company, reported its Q4 2017 results yesterday pre-market, highlighted here.  We stated with with the majority of the cost restructuring initiatives behind them, BXC has now reported two straight quarters of top and bottom line improvements and seems well-positioned to continue this trend in 2018.  We encourage you to read the conference call transcript which offered more color on the Company’s future outlook.  Notable exerpts from the call include:

“As we discussed our last call, we are now pivoting to focus on many of the sales growth objectives we identified in our strategy session in the fourth quarter of 2017. We are making investments in equipment, inventory and new sales team members in areas of the business where we feel we have significant market share opportunities.”

“As I mentioned on our last call, these organic growth initiatives to enhance our market share will take time. While we are making good progress executing on many of these initiatives, I still do not anticipate that the organic growth initiatives we established during the fourth quarter will result in meaningful market share improvement until the second half of this year.”

“We estimate that our remaining owned real estate, which is currently unencumbered, is in the $150 million to $160 million range. This value is based on independent third-party real estate appraisals that were conducted on all of our properties. The aggregate value of these appraisals is consistent with the fair market value we have estimated in the past. We continue to view our real estate as a valuable resource for additional capital, liquidity and potential strategic initiatives for the company.”

And lastly, in the Q&A, when asked about how far along the company is with the EBITDA margin improvement initiatives, CEO Mitch Lewis stated he thinks of them as in the third inning and sees further opportunities to improve.

The full transcript can be read here.

Monday, April 16, 2018

Bluelinx Holdings Inc. (NYSE:BXC) ($35.35) – Bluelinx Holdings announced that its acquisition of Cedar Creek has closed. The combination of BlueLinx and Cedar Creek creates one of the largest wholesale distribution companies in the building products industry, with combined revenue of approximately $3.2 billion in 2017. With one of the largest product offerings in the industry and over 70 locations, the combined company will utilize its broad footprint to better serve its extensive network of customers.

Management commented:

“We are pleased to announce today that we have finalized the strategic acquisition of Cedar Creek which marks a new, transformative era for our company,” said Mitch Lewis, President and Chief Executive Officer of BlueLinx. “We are in an even stronger position to continue to drive growth, deliver differentiated value to our customers and suppliers, and generate strong returns for our shareholders.”

We provided commentary to our members on this acquisition when it was first announced here. We initially took our position in BXC in August of 2016 when the stock was trading at ~$8.00.  BXC has been part of our “Buy on Pullback Mock” Portfolio 3.0 since October 2016. On October 19, 2017 we also added BXC to our “Buy on Pullback” Mock Portfolio 6.0 on a selloff that was based on the non-dilutive financing.  And most recently, BXC was added to our Favorite stock list on December 4, 2017 and highlighted by Maj as one of the 4 stocks in his latest March 7, 2018 article , “Insiders Are Betting Big On These 4 Stocks, and So Am I”.  The article highlighted how a combination of insider buying and information arbitrage provided solid clues on the strength of investments in 4 stocks.

Thursday, May 3, 2018

Bluelinx Holdings (NYSE:BXC) ($39.92; $367.7M market cap), a building supply company, announced Q1 2018 results:

  • Sales of $437.5 million vs $428.6 million in the prior year
  • Non-GAAP net loss of $0.11 vs a loss of $0.05 in the prior year

Quotes from management:

“Our first quarter was perhaps the most productive in the history of BlueLinx. We entered into $110 million of sale leaseback transactions that allowed us to deleverage the balance sheet and enter into an agreement to acquire Cedar Creek,” said Mitch Lewis, President and Chief Executive Officer. “We completed our acquisition of Cedar Creek on April 13th, which positions us as one of the largest wholesale distributors in the building products industry. With more than 50,000 branded and private-label SKUs, a broad distribution footprint servicing 40 states, and approximately 700 sales associates calling on customers every day, we are confident that we are well-positioned to continue our growth and drive enhanced value for our shareholders.”

Investors should note that Q4 and Q1 are the seasonally weaker quarters for BXC. We would not be surprised to see a pullback in the stock, especially after nearly tripling on recent acquisition news (Cedar Creek). The story going forward will depend on how well BXC integrates this acquisition.

Thursday, May 17, 2018

**Favorite Stock Update / Call to Action – Removing BXC, But Remain Long After Paring Back Our Position

In our December 4, 2017 email we introduced Maj’s Favorite Stocks Model Portfolio screen. Building products company  Bluelinx Holdings Inc. (NYSE:BXC) ($38.25, $352M market cap) was one of the original six stocks that were listed as part of introduction of this portfolio. While we are maintaining a long position in BXC, after a >300% increase in price we are removing it from the portfolio.  Shares were trading at $9.70 at the time of our introduction of Maj’s favorites. After the Company’s announcement of a major acquisition, shares rocketed to highs over $41.  We have also pared back our position.

Monday, May 21, 2018

We are removing BXC from our ‘Buy on Pullback’ Mock Portfolios 3 and 6

Last week we removed Bluelinx Holdings Inc. (NYSE:BXC) ($38.38, $353M market cap) from our Favorite stock list after a >300% increase in price.  While we are still holding a portion of our long position, we are also removing BXC from Buy On Pullback portfolios.  BXC was added to:

  • Mock 3 on October 4, 2016 at $8.80, at current prices BXC shares are up 336%
  • Mock 6 on October 18, 2017 at $8.06, at current prices BXC shares are up 376%

Thursday, August 9, 2018

Bluelinx Holdings Inc. (NYSE:BXC)  ($32.39, $298M market cap) , a company that distributes building and industrial products in the United States,  announced  their 2nd quarter 2018 results and the successful completion of the acquisition of Cedar Creek.

  • Net Sales of $893 million for the Quarter; Up $419 million From Q2 2017
  • Pro forma Adjusted EBITDA was $37.6 million, up 53.9% from this period a year ago

Management commentary:

“We are pleased with our second quarter results during the period in which we also completed the acquisition of Cedar Creek,” said Mitch Lewis, President and Chief Executive Officer. “While we are still early in our 18-month integration process, based on specific opportunities we have identified and actions taken to date, we are increasingly confident in our ability to generate at least $50 million in annual synergies. We remain well-positioned to continue our growth and drive enhanced value for our shareholders.”

In March, we published  a case study on BXC  in which revisited the opportunity to hop into an investment in the company as a major legacy shareholder (private equity firm Cerberus Capital) sold its stake through an underwriter at a big discount, making for an attractive entry point. The icing on the cake was the company’s announcement that it entered into a strategic merger agreement to acquire Cedar Creek, essentially doubling revenues.  This sent the stock soaring from ~$16 to ~ $28 in one trading session. Over the course of the next 3 months, BXC saw its price rise to $46 per share, however just recently settling back to the low $30’s before today’s earnings announcement. The stock was marked up nearly 20% on light pre-market trading.

Friday, December 28, 2018

Bluelinx Holdings Inc. (NYSE:BXC) – 10% holder of BXC stock, Nokomis Capital, L.L.C., filed a Form 4 yesterday indicating that they had added 49,117 shares to their already existing 1.1M shares. According to the Form 4, the range of purchase prices was $20.36 to $20.55. We are currently long BXC and you can view all of our coverage on the name here

Monday, December 31, 2018

Research

Bluelinx Holdings Inc. (NYSE:BXC)  ($25.31, $235.2M market cap), a company that distributes building and industrial products in the United States, is seeing some continued buying from Nokomis Capital. On Friday, we mentioned that Nokomis filed a Form 4 showing they added over 40,000 shares to its already large stake of 1.1 million. After the close that same day, Nokomis filed another Form 4 showing they added yet another 105,000.

Shares were up 14.6% on Friday.

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Updated January 23, 2019 to reflect most recent research

About the Author:

GeoInvesting is an investment research boutique in Skippack, Pennsylvania The GeoTeam's focus is on providing high quality stock market research tools and in-depth due diligence on U.S. small and micro-cap equities and on Chinese companies trading in China and the U.S. Several notable media outlets have credited Geo with exposing numerous fraudulent companies in China. We have also built a reputation in the US small and micro-cap space as champions of transparency. On the long side, we have developed a niche for picking stocks that have the propensity to get acquired at attractive premiums to their current prices. Our team is currently comprised of 13 analysts and traders and 7 on-the-ground researchers in Mainland China.

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