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Showers, garages, and shelves: how the Installed Building Products business works

Installed Building Products (NYSE: IBP) is an American home improvement company. It has had a great year, despite the problems with the pandemic. And the company’s future prospects look pretty good.

What they make money on

The company installs water and fire protection, windows, curtains, shower and garage doors, gutters and other things you need for repairs in homes.

According to the annual report, the company’s revenue is divided into the following segments:

  1. Thermal insulation of premises. Fiberglass, foam and cellulose insulation installation services – 64% of profits.
  2. Water protection. Installation of waterproofing membranes, various coatings – 7%.
  3. Installation of shower doors, mirrors and shelves – 7%.
  4. Garage door installation – 6%.
  5. Installation of gutters for gutters – 3%.
  6. Various types of window coverings: from blinds to blackout systems – 3%.
  7. The installation of other residential gizmos, which the report did not bother to name, is 10%.

82% of the company’s revenue comes from residential buildings, but 18% comes from commercial real estate. The company operates only in the United States.

The company’s revenue by type of real estate in Q3 2020

New single-family homes63%
New apartment buildings12%
Repairs and remodeling7%
Commercial Real Estate18%

Source: Company presentation, slide 4

Revenue for the last 12 months in billions of dollars, final margin as a percentage of revenue. Source: Macrotrends

Everything is yes

Despite all the crown crisis problems, 2020 for the company came out very well: sales rose in all segments, including even commercial real estate, which, in theory, should have been a failure because of the exodus of residents and workers from large cities.

The U.S. real estate market continues to show excellent growth rates. There is less and less real estate, and the demand for it is getting higher. And even if new homes are beyond the means of potential buyers, it does not cancel out the growing demand for new homes. It will grow by building homes for rent – the good news is that it’s profitable. And the average age of real estate in the U.S. is very high – about 40 years. And that means that demand for renovations will grow as well. All these factors combine to create a favorable situation for IBP.

Moreover, the company may well be bought. It could be someone from among the big house builders like Toll Brothers: in fact IBP does work that complements the process of building houses, because a house is not just four walls and a roof. And to buy IBP in order to integrate it into its operations would be a quite reasonable solution for a large enough builder. The company’s price is reasonable: capitalization at $3.6 billion and P/E of about 40. Of course, this is a lot, but not shamelessly much.

The company’s revenue in the markets segment in thousands of dollars and percentages

1 Jul – 30 Sep 20191 Jul – 30 Sep 20201 Jan – 30 Sep 20191 Jan – 30 Sep 2020
Construction of residential buildings297 003315 434840 806912 095
Repairs and remodeling25 02928 62571 25475 702
Commercial Real Estate74 41776 427198 338223 959
Total396 449420 4861 110 3981 211 756
1 Jul – 30 Sep 20191 Jul – 30 Sep 20201 Jan – 30 Sep 20191 Jan – 30 Sep 2020
Construction of residential buildings75%75%76%75%
Repairs and remodeling6%7%6%6%
Commercial Real Estate19%18%18%19%

The company’s revenue in the services segment in thousands of dollars and percentages

1 Jul – 30 Sep 20191 Jul – 30 Sep 20201 Jan – 30 Sep 20191 Jan – 30 Sep 2020
Thermal insulation253 311268 292710 005779 045
Protection against water32 78133 27284 02489 855
Doors, shelves, mirrors27 01129 28277 82885 199
Garage doors22 33624 00165 79068 655
Gutters for gutters13 36617 29537 56141 942
Window coverings10 61512 16630 78034 651
Other Products37 02936 178104 410112 409
Total396 449420 4861 110 3981 211 756
1 Jul – 30 Sep 20191 Jul – 30 Sep 20201 Jan – 30 Sep 20191 Jan – 30 Sep 2020
Thermal insulation64%64%64%64%
Protection against water8%8%8%7%
Doors, shelves, mirrors7%7%7%7%
Garage doors6%6%6%6%
Gutters for gutters3%4%3%4%
Window coverings3%3%3%3%
Other Products9%8%9%9%

Source: Company Quarterly Report, page 9 (12)

Summary

Given the trends in the U.S. real estate market, IBP looks like a very good option for investment. Of course, it is necessary to take into account the probability that the decrease of orders in the sphere of commercial real estate will spoil the company’s reports. And the growth in the real estate market cannot go on forever. But here it is possible to take the risk and invest in these shares for the perspective of several years – mainly in expectation of purchase of the company by someone bigger.

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