2024 Acquisitions Of CM Tucker Lumber And Southeast Forest Products Will Strengthen US Presence

Key Takeaways

• Expansion into the U.S. through acquisitions and product diversification positions Doman for revenue growth and operational efficiency improvements.
  
• Strengthened financial flexibility from credit facilities and note offerings enhances the potential for strategic investments and earnings growth.
  
• Macroeconomic headwinds, acquisition reliance, and rising expenses challenge revenue and margins, with increased debt and weather risks affecting financial stability and cash flow.

Catalysts

Through its subsidiaries, engages in the wholesale distribution of building materials and home renovation products in the United States and Canada.

• The acquisition of CM Tucker Lumber and Southeast Forest Products in 2024 expands Doman's footprint in the U.S., positioning the company for further growth and potential revenue increases as these acquisitions begin to integrate and contribute more substantially.
  
• The strategic focus on operational efficiencies, such as potential automation and productivity enhancements in sawmills, could improve net margins by reducing labor costs and increasing production efficiency.
  
• The renewal and increase of the credit facility to $580 million, along with successful senior unsecured note offerings, strengthen financial flexibility, allowing for strategic investments or acquisitions that could boost earnings.
  
• Organic growth opportunities leveraging the national footprint in the U.S. and adding new product lines like treated lumber and fire-retardant products can capitalize on market demand, potentially driving revenue higher.
  
• Despite near-term challenges from tariffs or weather impacts, the company anticipates strong sales and earnings growth driven by a diversified business model and a focus on protecting margins, indicating a potential rebound in revenues and earnings if market conditions improve.

Doman Building Materials Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Doman Building Materials Group's revenue will grow by 11.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.0% today to 3.2% in 3 years time.
• Analysts expect earnings to reach CA$117.0 million (and earnings per share of CA$1.33) by about May 2028, up from CA$54.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.5x on those 2028 earnings, down from 11.1x today. This future PE is lower than the current PE for the CA Trade Distributors industry at 12.3x.
• Analysts expect the number of shares outstanding to grow by 0.3% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.92%, as per the Simply Wall St company report.

Doman Building Materials Group Future Earnings Per Share Growth

Risks

• The company faces macroeconomic headwinds and challenges, such as lower pricing levels for construction materials, particularly impacting revenue and gross margin in the U.S. markets.
  
• There is a significant reliance on acquisitions for revenue growth, which introduces integration risks and potential financial strain, affecting EBITDA and net earnings.
  
• Rising expenses, including distribution, selling, administrative, and finance costs driven by inflationary pressures and recent acquisitions, could adversely affect net margins.
  
• Increased debt levels due to recent acquisitions and financing activities (e.g., unsecured notes) may lead to higher finance costs, impacting net income and the company’s ability to pursue further acquisitions.
  
• Weather-related disruptions and seasonal slowdowns present operational risks, potentially leading to fluctuations in quarterly revenues and impacting cash flow.

Valuation

• The analysts have a consensus price target of CA$9.25 for Doman Building Materials Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$11.0, and the most bearish reporting a price target of just CA$7.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$3.6 billion, earnings will come to CA$117.0 million, and it would be trading on a PE ratio of 9.5x, assuming you use a discount rate of 10.9%.
• Given the current share price of CA$6.89, the analyst price target of CA$9.25 is 25.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.