Summary

• Continental Building Products has a decent history of improving margins and strengthening its financial position.
• Moreover, the recovering construction industry is offering decent growth prospects to its players and the company looks well-positioned to capitalize on the available opportunities.
• The company is working on improving its operational efficiency and also has an edge over its competitors that will help it to meet the rising demand for its products.

The construction and related building product industry represent two of the best investments in a recovering economic environment. Continental Building Products, Inc. (NYSE:CBPX ) is a leading gypsum wallboard manufacturer that has been doing immensely well over the past few years and has witnessed a strong growth rate in its financials. This stock is one of those investments that can add attractive returns to your portfolio and is a worthy buy for the long term. Let us take a look at a few things I admire about the investment that make me confident about its future performance.

Strong Margins and Impressive Financial Momentum

The company appears to be highly focused on operational excellence with its low cost production structure and has done pretty well over the past few years. Continental Building Products generated total revenue of nearly $114 million in the recently ended quarter compared to $36 million in the third quarter of 2013 reflecting an attractive growth rate of more than 200%. The net income also increased from negative $5 million to about $9.5 million during the period under discussion. The higher sales revenue over the past few years was primarily driven by higher sales volume along with increased mill net price per MSF (millions of square feet). Continental Building Products has significantly increased its sales volume from 1,903 MSF in 2012 to 2,185 MSF in LTM Q3 2014 reflecting an annual rise of about 5%. The mill net price has jumped from $124 per MSF to $156 per MSF during the same period.

The total adjusted EBITDA has increased from $41 million in 2012 to nearly $110 million LTM Q3 2014 reflecting an annual increase of about 39%. Not only has the company generated attractive profits but it has also successfully converted them into strong cash flows. The company successfully converted about 57% of EBITDA to $46 million of operating cash flows in the first nine months of 2014. Moreover, the total long-term debt has decreased from $560 at the beginning of the year to $374 in the recently ended quarter reflecting a decrease of about 34%. The net debt/LTM adjusted EBITDA has also decreased by220 bps over the last nine months and reached 3.3x as of September 2014.

There is Substantial Room for Continued Improvement

The demand for the company’s products directly depends on the level of residential and commercial construction activity in the country. I believe the company will continue to report impressive results in the future as the industry prospects look quite promising. In 2013, Continental Building Products generated nearly 89% of its sales revenue from the United States and 11% from outside of the U.S. thus for analysis purposes, I will mainly focus on the construction industry in the U.S.

The reviving macroeconomic conditions of the United States are boosting the construction activity in the country. The number of U.S. housing starts is rapidly recovering and reached an annual rate of 1,017,000 in September 2014 reflecting an increase of nearly 17.8% compared to 863,000 in September 2013. The number of residential building permits has also risen from 993,000 to 1,018,000 during the period under discussion. Moreover, the sharply declining mortgage rates in the U.S. will also lift the housing construction activity in the country. According to Freddie Mac the 30-year mortgage rates have fell to 3.92% from 4.53% at the beginning of the year. Since the future performance of Continental Building Products is strongly correlated to the level of the U.S. residential construction activity, the company is expected to witness a huge growth rate in both its top and bottom lines by accommodating the rising demand for gypsum wallboard and complementary finishing products.

Moreover, the increased level of spending on house remodeling is also boosting the demand for the company’s products. The U.S. Census Bureau reports that homeowners in the U.S. have spent nearly $130 billion on remodeling their houses last year reflecting an increase of nearly 3.1% compared to 2012. This was the highest spending level since 2007. According to research by Harvard Center. U.S. consumers’ spending on house remodeling is expected to increase 3.5% annually by the end of 2015.

Furthermore, the rebounding U.S. economy has boosted the number of business startups and increased the level of commercial construction activity in the country. According to the Global Entrepreneur Monitor (GEM ), more than 12% of U.S. adults started their business in 2011 compared to only 8% in 2010. The number of small businesses in the United States has increased by nearly 49% since 1982. Rising business startups continue to boost the non-residential construction activity that witnessed an increase of nearly 5.8% this year. This included office construction that rose 3.1% in April 2014 reflecting an increase of approximately 26% since April 2013. According to the American Institute of Architects (AIA ), the total commercial construction in the U.S. is expected to increase by nearly 4.9% by the end of 2015. The rapidly surging commercial construction activity will boost the demand for the company’s products in the near future.

The Company is Highly Committed to Achieving Operational Efficiency

Furthermore, the company is devoted to achieving low cost production through enhanced operational efficiency and has invested more than $550 million in CAPEX since 2000. The company now owns some of the fastest line speeds in the industry which drives its lower fixed costs per unit of production. The company has also successfully reduced its energy consumption costs per MSF by 16% from 2007 to 2013. The closure of a few inefficient plants along with continued investments in CAPEX assures operational excellence and higher profits in the coming years. Its efficiency gives it an edge over its competitors and allows it to full capitalize on available market opportunities. Another factor that enhances the company’s operational efficiency is the fact that its plants are located near raw material sources and customer end markets. Being near to the major markets will support the company’s ability to offer quick delivery services to its customers. These superior services will allow it to win more contracts than its competitors. Moreover, the strategic placing of the company’s plants near raw material sources assures the effective procurement of raw materials thus meeting the customers’ orders on a timely basis.

The Company has an Edge over its Competitors

Beside the attractive industry growth prospects, Continental Building Products is undergoing a favorable industry transformation. The company seems to lead the market and has comparatively more potential to capitalize on the available opportunities than its competitors. The industry has been consolidating since 1997 when there were 13 gypsum wallboard producers compared to only 7 in 2013. The company has successfully increased its national market share from just 2% in 1997 to about 10% last year. Most of the competitors have already left the industry during this period and Continental Building Products is one of the largest gypsum wallboard producers in the United States.

Moreover, the industry’s total capacity has reduced from 39.6 billion square feet in 2008 to about 32.7 billion square feet in 2013 reflecting an annual decline of about 3%. Reduced capacity would force the industry players to increase their prices in order to meet their margin targets. However, Continental Building Products’s future performance does not seem to be affected from the present market conditions. The company owns some of the largest and most modern wallboard facilities in North America which have resulted in it boasting the highest productivity levels in the industry. The company has a total capacity of about 3,300 million square feet and has also been gradually increasing its capacity utilization over the past few years. Its facilities operate at production speeds that are significantly faster than the industry average. Its capacity utilization has increased from 58% in 2012 to 66% in LTM Q3 2014. The company seems to be catering to the market and will continue to do so because of its superior operational facilities.

Final Verdict

The industry is offering attractive growth prospects to its players and Continental Building Products looks well positioned to cater to the growing market. It is working on improving its operational efficiency and also has an edge over its competitors that will help it to meet the rising demand for its products. Moreover, the company’s estimated P/E ratio of 34.1 is much lower than the current P/E ratio of 55.9 suggesting that analysts are also expecting higher earnings in the future. Based on my analysis, I give the stock a buy rating.