BXC - Bluelinx Holdings

[muscleman]

I am sure a lot of you are tracking GreenHavenRoad, a small fund that's been doing well. This is one of their positions that seems to have gone down big this week on earnings.

I wonder if some of you would love to own this undervalued name?

[Spekulatius]

What makes you believe that BXC is undervalued? It appears that this merger combination didn’t work and they are losing a ton of business. Thee is also $500M in debt plus $150M in leading liabilities ,negative shareholder equity. This could easily be a zero within a short timeframe.

[Guest cherzeca]

commodity prices of lumber are in the toilet.

[RVP]

This is a tough one, but I'm inclined to agree with Spekulatius. To be fair, they have some properties to monetize and as a distributor they can probably adjust their cost structure to adapt to a rather cyclical industry. But the CEO did mention on the earnings call that they are more sensitive to commodity fluctuations because they do very little fixed sale prices. At the same time, their margins are very slim as a wholesale distributor, which was probably the raison d'etre of their merger to achieve scale.

 

The big question is whether or not that scale is enough to give them bargaining power to flex margins. Is their scale sufficient to deal with the scale on the manufacturing side, as well as the end user side? I'm not intimately familiar with the industry dynamics here, but I think anyone investing in BXC needs to be. A heavy debt load + slim margins + cyclicality = little room for error.     

[5xEBITDA]

Gross. Knowing next to nothing about the Company aside from work I've done on HBP years ago, and taking a glance through their 3Q and May investor presentation...

 

3Q19 Adj. EBITDA of $19 million is ~$76 million annualized. Net of $70 million annual cash needs (of which $56 million is cash interest), you're left with ~$6 million free cash flow which is assuming that LQA Adj. EBITDA doesn't get any worse...I think it probably will. Implied here is a 2.8% EBITDA margin which is pretty close to top of the cycle for this Company.

 

Mid-cycle margins are probably in the 1.0 - 1.5% neighborhood, so on FY19E revenue of $2.7 billion you yield ~$40 million EBITDA which is not enough to cover even your cash interest expense.

 

There is $350 million of ABL secured by $244 A/R and $362 million inventory. A/R is probably worth $207 million and inventory...it is, what, hardware supplies? Lets call that $145 million. So working capital covers the ABL by a hair, ok fine.

 

So $2 million surplus from the above analysis plus another $36 million in other current assets ($42 million book value). Additionally, the Company reported an appraised value of $160 million real estate in the May investor presentation so we'll just say that is fine. So $198 million remaining asset value to cover the $140 million remaining term loan balance. Residual value from there is $58 million to satisfy $604 million unsecured liabilities. Much bigger hole than the $21 million stockholders' deficit currently reported.

 

That is a worst case scenario, though. Using the above LAQ EBITDA of $76 million and a ~10x multiple (using Bloomberg comps to be quick) we get an enterprise value of $760 million and then there is $13 million cash on the balance sheet, so $773 million distributable value. $490 million ABL + TL debt is still satisfied at par, and the residual $283 million goes a little bit further for the remaining liabilities, but still I don't think there is really any credible equity value here unless you really grow EBITDA margins.

[kab60]

Looks about right. I think it's common that you'll have negative sales synergies in these kind of deals, and some of that might come back, but Bluelinx basically went up 300 pct. after the merger because everyone seemed attracted to technical selling from PE sponsor (Cerberus) and a blue sky scenario from the Cedar Creek acquisition combined with the attraction of high leverage.

 

In this case I seem to recall the thesis was that Cerberus had to close down their fund and thus had to blow out of the position, but PE is flush in cash and it's not inconceivable that they could've sold their stake on to another one of their funds - or another PE shop that could launch a takeover of the whole thing if the opportunity was delicious. When looking at a long term chart this seems like a pretty crappy business, to say the least, and now they're struggling with a big integration and negative sales synergies. Perhaps Cerberus got it right by selling at $7.

[StevieV]

"The big question is whether or not that scale is enough to give them bargaining power to flex margins. "

 

I don't think so.  I'd have to go back and refresh my memory, but I thought that the case for margin improvement due to scale related to savings on the operations side due to scale, not increased bargaining power.  At least some of that isn't happening, at least not yet.

 

From the call, they thought they could achieve $5-8 million of operational savings in H2 of 2019.  That didn't happen and say it won't in Q4.  Those are real numbers for a company of this size.

 

Also a big following of BXC on VIC.

[RVP]

"The big question is whether or not that scale is enough to give them bargaining power to flex margins. "

 

I don't think so.  I'd have to go back and refresh my memory, but I thought that the case for margin improvement due to scale related to savings on the operations side due to scale, not increased bargaining power.  At least some of that isn't happening, at least not yet.

 

From the call, they thought they could achieve $5-8 million of operational savings in H2 of 2019.  That didn't happen and say it won't in Q4.  Those are real numbers for a company of this size.

 

Also a big following of BXC on VIC.

 

You're right, thanks for the correction. However with the current top line, I'm not certain cost optimization alone is enough.

[5xEBITDA]

Looks about right. I think it's common that you'll have negative sales synergies in these kind of deals, and some of that might come back, but Bluelinx basically went up 300 pct. after the merger because everyone seemed attracted to technical selling from PE sponsor (Cerberus) and a blue sky scenario from the Cedar Creek acquisition combined with the attraction of high leverage.

 

In this case I seem to recall the thesis was that Cerberus had to close down their fund and thus had to blow out of the position, but PE is flush in cash and it's not inconceivable that they could've sold their stake on to another one of their funds - or another PE shop that could launch a takeover of the whole thing if the opportunity was delicious. When looking at a long term chart this seems like a pretty crappy business, to say the least, and now they're struggling with a big integration and negative sales synergies. Perhaps Cerberus got it right by selling at $7.

 

Yeah, Cerberus wouldn't have sold unless they thought selling was the best idea.

[Spekulatius]

"The big question is whether or not that scale is enough to give them bargaining power to flex margins. "

 

I don't think so.  I'd have to go back and refresh my memory, but I thought that the case for margin improvement due to scale related to savings on the operations side due to scale, not increased bargaining power.  At least some of that isn't happening, at least not yet.

 

From the call, they thought they could achieve $5-8 million of operational savings in H2 of 2019.  That didn't happen and say it won't in Q4.  Those are real numbers for a company of this size.

 

Also a big following of BXC on VIC.

 

I believe the story was that both companies merging together had the same geographical footprint, so a ton of duplicate locations and costs could be taken out. I  remember $8/ share in FCF as an expected run rate after the restructuring. I am guessing the underlying assumption was that the combined entity wouldn’t lose much sales, but that clearly not the case.

[movys]

I was involved here and know the story quite well.  The merger was so attractive because the synergies (which they actually achieved in short order) were enormous.  It was a BLDR/ProBuild redux.  FCF never materialized because the collapse in lumber prices crushed their margins.  Margins are now recovering nicely, but they lost a large siding customer last quarter and it became clear on the call yesterday that the sales dis-synergies are more serious than people (including management) realized.  This was the nail in the coffin.  A declining top line will kill this levered business quickly, which is why it is justifiably down ~50% in 2 days.