Fructivore Investments

BlueLinx (BXC) is a wholesaler of construction materials, mostly wood products such as lumber, siding, and plywood. What interests me, though, is the company’s enormous cash reserves. Of its $800 million market cap, nearly $500 million consists of cash, the fruit of a very profitable 2021 and 2022, which the company seems to have no idea what to do with. Obviously my suggestion would be either a massive special dividend or repurchasing of shares (the company has repurchased $120 million so far, but it could handle plenty more), but the point is that for a cash-flow-positive business with a credit facility available to cover liquidity needs, most of that cash may be considered “excess,” and can essentially be deducted from the company’s market cap when analyzing it.

In terms of financial theory, a company is basically worth the money it has plus the present value of the money it will have. Obviously a company needs to keep some cash on hand for liquidity needs or other conveniences, but the issue is one of return on assets. Ordinarily every asset inside a company is contributing to that company’s return on assets, and the attractiveness of the company depends on whether its assets exceed, equal, or fall below the investor’s required return, and since that return is invariably higher than the short term interest rate for cash, a company should try to operate with as little cash tied up as possible. However, if there is “excess” cash not needed for the company’s operations, that cash is not required to meet any return on assets hurdle, because it can (and usually should) be distributed to the shareholders. I should point out that at the beginning of 2021, the company operated with the princely sum of $82,000 in cash on its balance sheet.

So, if we reduce the company’s market cap to $310 million, are the company’s earnings adequate? I did point out that 2021 and 2022 were remarkably profitable years. In fact, the company’s net income was $300 million in each of those years, and if those results were repeated the company would have a P/E ratio of…one. However, the market recognized those results as largely exceptional, with the share price actually declining in 2022, and as the company is essentially tied to the home construction market, which is apparently in a bit of a slump right now, this is understandable.

At any rate, in 2023 sales were $3136 million, gross profit was $527 million, operating income was $138 million, net interest expense (the company only started reporting interest income and expense separately in 2024–again, not used to having lots of cash lying around) was $24 million, leaving $114 million, or $92 million after taxes.

In 2022, sales were $4450 million, gross profit was $833 million, operating income was $439 million, interest was $42 million, leaving $394 million, or $311 million after a provision for taxes.

In 2021, sales were $4277 million, gross profit was $778 million, operating income was $438 million, interest was $46 million, leaving $392 million, or $311 million again.

It is unfortunate that BlueLinx’s gross profit margins tend to decline alongside sales, but that is the nature of operating as a warehouser and distributor. However, the company has been able to reduce inventory levels by nearly 30% between the end of 2022 and 2023, freeing up an additional $140 million in cash which, although not a suitable measure of long term free cash flow generation, as I have written before does suggest that management is not unaware or unresponsive to the slow housing construction market, even though selling, general & administrative expenses haven’t declined significantly since 2022.

At any rate, for 2024 to date sales were $1494 million versus $1613 million for the first half of 2023, gross profit was $250 million versus $269 million, operating income was $52 million vs $72 million, interest expense was $24 million versus $23 million, leaving $28 million versus $39 million, or $22 million estimated net income after taxes versus $31 million for the same period last year. Furthermore, depreciation exceeded capital expenditures by $7.6 million when historically they have tracked each other more closely, which is a source of additional free cash flow, not to mention a small further reduction in inventory.

So, if in a slump in the housing construction market the company is still able to produce, say, $50 million in free cash flow, that looks like a fairly anemic return against a market cap of $800 million but really quite impressive for a market cap of $310 million. And if the company is agile enough to take advantage of a resurgence in the market, as they were in 2021 and 2022, there may be other significant earnings windfalls in the future. However, I am not sure whether the housing industry in the United States has really reached its nadir, or whether the company enjoys a substantial competitive advantage against any competitors, so I would conclude it to be an attractive candidate for investment but not an unqualified buy.

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Uncategorized by grocca