Installed Building Products, Inc.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

Installed Building Products, Inc. is a national installer of insulation, waterproofing, fireproofing, and other complementary building products, with a focus on residential and commercial construction markets.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Installed Building Products, Inc. (IBP) operates within the fragmented building products installation industry, where they differentiate themselves mainly through a decentralized business model and high quality service. This report analyzes IBP’s competitive positioning, moat, balance sheet and various other important metrics.

Business Overview and Competitive Landscape

Installed Building Products (IBP) is a leading installer of insulation and other complementary building products in the United States. Their services include insulation, waterproofing, firestopping, fireproofing, and air barrier applications. The company’s core operating segment focuses on providing services to residential and commercial customers, operating through a nationwide network of branches.

  • Revenue Distribution: IBP generates revenue through a variety of channels, and its revenue is categorized as Installation revenue and Material and other revenue. The company is focusing to drive revenue and growth through acquisition of smaller players and providing value to customers by increasing its share in key markets. As of their latest Q3 2022 earnings, Installation revenue accounted for 70.5% of net revenue and the rest went to “Other” revenues.
  • Industry Dynamics: The building products industry in general and the installation segment in particular are highly fragmented, with a mix of national, regional, and local players. Competition is fierce, and it is driven by price, customer relationships, and service quality. In their latest 10-Q report, IBP management cited various factors negatively impacting their business including: “The cyclical and seasonal nature of our business,”, “a highly fragmented and competitive industry,” “ability to secure supply and control labor costs,” and “Our reliance on key personnel.” and the volatility in interest rates. The housing market has experienced a drop due to increasing mortgage interest rates, but prices remain elevated due to low supply.
  • Competitive Advantages: They have a significant scale advantage that will likely lead them to further increase their operating margins. The key factors that allows them to have a competitive edge over rivals are:
    • Nationwide Network: IBP’s extensive network of branches provides it with a local presence in many markets and strong customer relationships, something which could be difficult for new companies to replicate.
    • Scalable Operating Structure: The company’s scalable operations allows them to leverage fixed costs.
    • Strong Sourcing Capabilities: IBP is focused on maintaining strong relationship with its manufacturers and partners allowing it to obtain materials quicker, easier and cheaper.
    • Focus on value delivery: They have a strong focus on training and improving workforce, improving service, and managing costs.
  • Competitors: IBP’s main competitors include national installers, local, and regional installers, and in some cases, direct-to-consumer products. They are listed in a 10-k filing: “competitors range from large, national companies to small regional and local companies offering similar services or products to those we offer.”
  • Differentiation: The company stands out due to its strong distribution model, focus on local relationships, and its ability to serve a wide range of customers in both residential and commercial construction. It also stands out because of its scale and its reputation in the industry, built upon quality and consistency.

The business strategy of IBP revolves around a balance of growth and capital returns. They focus on acquiring smaller players to rapidly increase their share of the market while also focusing to return capital to shareholders through dividends. They are also trying to navigate supply chain challenges and high inflation by raising prices, and renegotiating contracts. Their focus for the future is to continue acquiring and integrating regional players, growing organically and through acquisitions, and strengthening their culture and performance.

Moat Analysis - 2 / 5

Based on the provided information, it is reasonable to say IBP has a narrow moat and not a wide one, this is why I have assigned it a 2 rating. Here’s why:

  • Network Effect: Not applicable. While IBP benefits from its extensive network, it doesn’t generate the network effect of some technology or financial services. This is also because the number of locations of its branches doesn’t provide its customers more value.
  • Switching Costs: Switching costs aren’t very high for customers. It’s a good product and a good service, but clients can fairly easily get similar service from another provider. While there may be the pain point of switching to a new contractor, that’s not as strong as the pain of migrating a business bank account or something similar. This gives IBP a low level of pricing power.
  • Intangible Assets: Brands, Patents, and Regulatory Licenses: Limited. IBP doesn’t rely on brands or patents, since it is mostly a service company. They have a presence, but that doesn’t create a huge advantage in pricing power. Regulatory licenses are not a significant factor in the market that IBP operates on, but they do help it achieve an easier process. In other markets, especially in areas with high regulatory burden, such as utilities or highly accredited schools, such regulatory burden will lead to economic moats, in this case it just helps the company to operate.
  • Cost Advantages: Distribution and Scale: IBP achieves lower costs through economies of scale and having a large network of distributors. The scale is especially helpful in high density locations, and it is more effective as logistics for this is cheaper. This is what lets it make profits in lower density, rural locations. IBP also obtains lower costs through strong relationship with manufacturing partners.

These factors give it some cost advantage over competition, but this isn’t a moat as a whole.

Therefore, based on this analysis, IBP doesn’t seem to have a particularly strong or long-lasting economic moat, but does have a slight one. The main reason is that while they achieve higher returns than their peers, competitors can still easily replicate its business model.

Risks to the Moat and Business Resilience

There are a few risks that can affect the profitability and value of IBP:

  • Cyclicality and Seasonality: The business depends on construction, which is a highly cyclical sector. Furthermore, they are heavily affected by seasons that affect their output. For example, the management noted that in their last report, they faced slowdowns in installation in December and January due to weather effects, while they had high volume in April, May and June.
  • Macroeconomic Factors: Inflation is also affecting the business by driving up prices of input materials, they’ve also been hit with higher gas prices which increase their transportation costs.
  • Competition: The building products installation industry is very competitive, and they face local and regional competition along with nationwide competitors. New and innovative competitors could lower the returns they have today.
  • Acquisition Risk: Acquisitions have been key in growth for IBP. Overpaying for acquisitions, or integration problems could hamper its growth.
  • Labor and Skill: As with any company in the installation business, skilled labor is key, shortages in workforce, increased union influence, and rising wages could negatively influence IBP.

Regarding business resilience, there are a few points to mention:

  • IBP is susceptible to market fluctuations that cause declines in housing sales, or a general economic downturn that reduces consumption.
  • They don’t have a durable competitive advantage. The high profitability is mainly based on efficiency of scale, not on an underlying moat, so a downturn could affect their value in the long run.
  • Although there are these risks, IBP management has a long track record of successful maneuvering of the company, and are taking all steps necessary to grow even during downturns.

In-Depth Financials

Here’s the in-depth look into their most recent filings:

  • Q3 2023 Performance: IBP reported net revenue of $703.9 million, a 9.2% increase year-over-year. They also reported a net income of $60.6 million, a decline from $87.1 million in the prior year, due to lower margins and a restructuring in certain segments. They were hit by increased interest rates, higher costs for materials and labor, and slowdowns in the housing market, which all impacted their earnings. On the flip side, they are gaining market share through acquisitions. The company saw organic revenue decline of 2.3% year-over-year, but still saw growth in Installation and Other revenue.
  • Margins: Their gross profit for the quarter was $184.4 million, slightly down from the year ago quarter. Selling, general and administrative expenses were $132.3 million, compared with $114.3 million in the previous year. They have a positive outlook on margin recovery, stating: “We expect margin improvement to begin in the fourth quarter, as we benefit from our various actions, including recent pricing increases, and continue to drive cost efficiencies throughout our operations”. They have been successful in increasing prices to customers in the past, and expect to continue to do so to combat high inflation.
  • Balance Sheet: Total current assets decreased from $878.7 million to $753.6 million from the start of the year and from $773.2 million from 2022. Total liabilities are $1.3 billion from $1.1 billion earlier in the year. They also have significant long-term debt at $1.2 billion. Their net debt to adjusted EBITDA ratio was 2.2 in the first quarter 2023, but was 1.6 in 2022. A low quick ratio and a debt heavy structure means a negative health rating.

Understandability - 2 / 5

The business model of IBP is not particularly complex, but there are certain aspects of its business and operations that need a lot of study and analysis. The cyclicality and seasonality of their business, along with the many variables for valuation make it somewhat challenging to value. For these reasons, I believe that IBP is at a 2 in understandability.

Balance Sheet Health - 3 / 5

IBP has a debt to equity ratio of 1.9 (total liabilities of $1.7B vs shareholders equity of $0.9B). This debt burden is quite concerning, but their cash reserves are reasonably healthy, the company also has solid free cash flows that will help with future debt repayments. They have also been able to renegotiate their debt and interest payments at attractive rates that could potentially help them in the future. Based on this analysis, we assign IBP a balance sheet health rating of 3.

Other Important Information

  • Management Comments on Recent Performance and Challenges
    • Management noted positive results, including record revenue and net income, and noted margin improvements and improvements in same-branch sales. Management stated that strong sales and higher margins came because of increased volume and efficiencies in production.
    • On the flip side, they acknowledged that they still face significant headwinds in the housing market, and those effects on the business may take some time to disappear.
    • They also mentioned high interest rates, increased costs for materials, equipment, and insurance costs negatively affecting their business, they are trying to offset these costs with price increases.
  • They were asked a few questions regarding market conditions: They noted that while the housing markets are currently volatile and unpredictable, they still see a great demand for their services.
  • Management emphasized the continued strength in pricing, even in markets experiencing downturn, because it is all based on relationships and value provided to clients. * They stated that while labor costs have risen over the year, they are finding success at attracting and retaining qualified employees while controlling labor costs
  • Shareholder returns: IBP has maintained share buyback programs and are planning to start using the repurchases at greater frequency. Also the company recently increased its dividend. Management is focused on giving back capital to shareholders, which is always a good sign.

In conclusion, while IBP faces challenges with regard to market environment and is a bit complex for new investors, it has some competitive advantages that will help it over the long term.