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Decisive Growth And Efficiency Optimizations Propel Revenue And EBITDA Despite Market Headwinds

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WarrenAINot Invested
Based on Analyst Price Targets

Published

September 04 2024

Updated

November 06 2024

Narratives are currently in beta

Key Takeaways

  • Strategic acquisitions and expansion into complementary products are expected to enhance revenue growth and diversification.
  • Initiatives aimed at operational efficiency, including a significant annual cost reduction program, are projected to improve net margins through reduced costs.
  • Anticipated prolonged revenue and margin pressure in multifamily and commercial sectors due to softening demand and steel price deflation.

Catalysts

About GMS
    Distributes wallboard, ceilings, steel framing and complementary construction products in the United States and Canada.
What are the underlying business or industry changes driving this perspective?
  • Recent acquisitions contributing to volume growth across major product categories are expected to continue to support revenue growth.
  • The initiation of a $25 million annualized cost reduction program aimed at simplification and efficiency optimization is likely to positively impact net margins through reduced operational costs.
  • Expansion into and growth of Complementary Products, with categories such as Insulation, Tools & Fasteners, and EIFS and stucco showing significant growth rates, expected to further enhance revenue diversification and growth.
  • Strategic acquisitions, such as R.S. Elliott, enhance GMS's platform and product offerings, likely contributing to revenue growth and potentially improving EBITDA margins through accretive margins from these acquired entities.
  • Investment in technology and process improvements to drive productivity and profitability, with effects such as improved working capital metrics and reduced organizational complexity, expected to positively impact net margins and earnings through operational efficiencies and cost savings.

Assumptions

How have these above catalysts been quantified?
  • Analysts are assuming GMS's revenue will grow by 3.8% annually over the next 3 years.
  • Analysts assume that profit margins will shrink from 4.4% today to 4.2% in 3 years time.
  • Analysts expect earnings to reach $257.5 million (and earnings per share of $6.63) by about November 2027, up from $246.5 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 17.2x on those 2027 earnings, up from 14.9x today. This future PE is greater than the current PE for the US Trade Distributors industry at 15.7x.
  • Analysts expect the number of shares outstanding to decline by 0.37% per year for the next 3 years.
  • To value all of this in today's dollars, we will use a discount rate of 7.77%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?
  • Demand softening in multifamily and commercial end markets, compounded by steel price deflation, indicates potential pressures on net sales and margins.
  • The 80 basis points decline in gross margin versus the prior year, reflecting mix impacts from declining commercial and multifamily deliveries, could persistently affect profitability if these end market conditions do not improve.
  • A significant 17% increase in interest expense and a decline in net income highlight financial pressures that could affect earnings and investor confidence if trends continue.
  • Declining commercial demand, with several sizable projects postponed or canceled, particularly impacts revenue prospects in this high-value sector.
  • Anticipated slow recovery in multifamily and commercial sectors until mid-2025 and beyond suggests prolonged revenue and margin pressure in these significant segments of GMS's business.

Valuation

How have all the factors above been brought together to estimate a fair value?
  • The analysts have a consensus price target of $93.0 for GMS 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 $115.0, and the most bearish reporting a price target of just $78.0.
  • In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $6.2 billion, earnings will come to $257.5 million, and it would be trading on a PE ratio of 17.2x, assuming you use a discount rate of 7.8%.
  • Given the current share price of $93.49, the analyst's price target of $93.0 is 0.5% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  • 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.

How well do narratives help inform your perspective?

Disclaimer

Warren A.I. is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by Warren A.I. are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that Warren A.I.'s analysis may not factor in the latest price-sensitive company announcements or qualitative material.

Read more narratives

Fair Value
US$93.0
11.0% overvalued intrinsic discount
WarrenAI's Fair Value
Future estimation in
PastFuture01b2b3b4b5b6b20142016201820202022202420262027Revenue US$6.2bEarnings US$257.5m
% p.a.
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Current revenue growth rate
3.67%
Trade Distributors revenue growth rate
0.13%
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