Brian MaddenDoman Building Materials Group Ltd.DBM.TOSELLOct 05, 2021

The stock price has out-performed others in the sector and it pays a 4 1/2 to 5% dividend. It is well run, and as more of a distribution company is considered midstream in the industry. He is looking for $15.

Core holding in his income growth fund. Doing a good job of distributing lumber (LOW is a big customer), and stock's been moving up. Cyclical, but not as much as the chart would indicate -- reacts to headlines. Solid business. Nice yield.

His pick today for an income focus. An analogy would be the way the mid-streamer Pembina operates. It buys lumber from the forestry companies and delivers it to the end retailer, treats it, or cuts it down. So it doesn't take on a lot of the volatile price risk; more of a margin and volume business. 

Has been a leader in Canada, but now has about 20% market share in the US. More volume means it gets more efficient and can take more market share. Will be a growth through acquisition story -- use some debt, lever it up, pay the debt off, and the acquisition feeds the cashflow. Yield is 5.82%, with actual free cashflow yield closer to 10-15%. Lots of room for dividend to increase once debt is paid down a bit.

Supplier to HD. Has gone down on recessionary fears. One of the big holdings in his income fund. Canada and US need to build more houses. Well run. Not a risky business. Big fat dividend yield of almost 9%.

One of his two choices in the space. Prefers the providers of building supplies rather than homebuilders themselves.

Sawmills and other building material sites in Canada and US. Building out larger US presence through acquisition. Earnings were fine, but stock dropped. Revenue far below expectations, but cashflow in line. Great job managing inventory and cash to pay dividend. Homebuilding should remain strong. He's looking to top up his position.

DBM operates as a wholesale distributor of building materials and home renovation products, and is now trading at 8.9x times' Forward P/E. In the last five years, growth was solid around 16% (one large acquisition in 2021), DBM recently experienced a revenue decline for the first time in many years; trailing twelve-month revenue declined around -13% compared to FY2022. The balance sheet is leveraged with net debt of $725M, and net debt/EBITDA is around 4.2x. Overall, a very cheap stock, but the leverage profile is still a possible concern, especially for a cyclical downturn (if interest rates and inflation remain challenging). For a cyclical name, we would be more comfortable waiting till the leverage level get down to a more sustainable level. Its small size also adds some risk, and based on consensus earnings are expected to be flat next year. 
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Billy Kawasaki’s Insights - Billy’s most-liked answers from 5i Research. Recent reported EPS and revenues missed estimates. A sharp rise in materials prices were pointed as reasons. Sales increased by 83.3%, partially due to acquisitions and the rest due to materials pricing. The equity position has increased significantly. The company’s financials are in pretty good shape and continue to grow top and bottom lines. Unlock Premium - Try 5i Free