Acquisition Of Tucker Lumber Will Expand Operations Into 10 New US States

Key Takeaways

• The acquisition and expansion into new states enhance earnings profile and provide significant growth opportunities.
  
• Operational efficiencies and strategic management are poised to boost margins and support sustainable growth.
  
• Cooling demand and pricing pressure, rising costs, and reliance on acquisitions risk future revenues and margins amid economic volatility.

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 Tucker Lumber is expected to be immediately accretive to EBITDA, free cash flow, and earnings per share, enhancing Doman's earnings profile significantly. This will likely impact earnings positively.
  
• The acquisition expands Doman's operations to 10 new U.S. states, providing scale and new market opportunities, which can drive future revenue growth.
  
• The integration of robotics and advanced production technologies from CM Tucker could improve operational efficiencies, potentially leading to greater net margins over time.
  
• The company's ability to deploy a national footprint across the U.S. for quoting national accounts is a unique competitive advantage that can increase revenue from large national customers.
  
• Optimizing working capital and focusing on balance sheet management is expected to generate strong free cash flows, contributing to debt reduction and supporting future growth initiatives.

Doman Building Materials Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Doman Building Materials Group's revenue will grow by 19.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.3% today to 2.9% in 3 years time.
• Analysts expect earnings to reach CA$121.4 million (and earnings per share of CA$1.39) by about February 2028, up from CA$56.4 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 10.8x on those 2028 earnings, down from 12.0x today. This future PE is lower than the current PE for the CA Trade Distributors industry at 13.0x.
• Analysts expect the number of shares outstanding to grow by 0.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.07%, as per the Simply Wall St company report.

Doman Building Materials Group Future Earnings Per Share Growth

Risks

• The cooling demand in the North American market and the downward pressure on construction materials pricing could negatively impact future revenues.
  
• Increased expenses, driven by inflationary pressures and acquisitions, suggest rising operational costs, which may compress net margins.
  
• The strategy appears heavily reliant on acquisition-led growth, which entails execution risks and could strain earnings if synergies are not realized swiftly.
  
• Higher finance costs due to increased interest rates on variable-rate loans may impact net earnings through elevated interest expenses.
  
• The decrease in EBITDA and net earnings year-over-year, combined with the volatile economic environment, might indicate underlying challenges in maintaining profitability and revenue growth.

Valuation

• The analysts have a consensus price target of CA$11.583 for Doman Building Materials Group based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$4.2 billion, earnings will come to CA$121.4 million, and it would be trading on a PE ratio of 10.8x, assuming you use a discount rate of 9.1%.
  
• Given the current share price of CA$7.75, the analyst price target of CA$11.58 is 33.1% 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.