Ryan Fuhrmann, CFA
November 30, 2007
Huttig Building Products recently gave a presentation at Southwestern Showcase 2007, an annual November event in Dallas. Most of the presenting firms also provided a recording of their presentations. I’ll be providing a recap of the events I attended, so be sure to check The Motley Fool’s daily headlines for updates.
Huttig Building Products (NYSE: HBP) bills itself as a two-step distributor of homebuilding products, but its “two-step advantage” has done little to help it sidestep the dramatic fall in housing starts affecting the United States. Huttig is indeed hurting. Its stock has fallen more than 28% from when I saw the company’s presentation at last year’s Southwestern Showcase, and even then, the stock was far below the highs it had reached when the nation’s housing mania was in full swing.
Huttig’s favorable housing outlook
The first question most investors had during this year’s presentation was when market conditions might stabilize — and management’s guesstimate was that struggles could “continue well into 2008.” Huttig’s current outlook calls for 1.1 million new housing starts this year, well below the 1.8 million starts in 2006 and just about half of the 2.1 million starts in 2005.
However, Huttig sees the long-term picture as quite bright, with “19.5 million new housing units expected” between 2005 and 2014. Huttig figures the growth will be driven by immigration, the continued retirement of baby boomers who will continue to look for second homes, and the simple reality that existing homes will only grow older. If that all happens, it could mean plenty of demand recovery for new-home materials and home-improvement spending — the kind of demand that Huttig and competitors such as BlueLinx (NYSE: BXC), Weyerhaeuser (NYSE: WY), Boise Cascade, and Universal Forest Products (Nasdaq: UFPI) desperately need in the current market environment.
The Huttig two-step
Back briefly to Huttig’s placement in the building-products food chain. Huttig refers to itself as a two-step distributor because of the dual-level distribution structure in the industry. There are building-product manufacturers, and then there are companies such as Huttig that help the “one-step” pro dealers by holding a good deal of product selection in their warehouses and therefore, management says, providing the necessary product depth and breadth. It also assembles products, as illustrated by its status as one the largest domestic providers of pre-hung doors, which ultimately end up in the hands of professional homebuilders and remodelers, such as Pulte Homes (NYSE: PHM) and D.R. Horton (NYSE: DHI).
Recent industry struggles haven’t been kind to Huttig; the third quarter resulted in breakeven earnings, which at least beat the loss the company reported in last year’s Q3. It should be no surprise, then, that management has embarked on cost-cutting efforts to stem significant sales slides — the most recent being a 20% drop during the third quarter. Over the past two years, Huttig has cut enough expenses to “generate $30-plus million in annual expense savings” and is shoring up its balance sheet by cutting long-term debt and reducing inventory.
Huttig has been able to maintain gross margins so far and generate positive operating cash flow — though just barely. Its goal is to return toÂ 5% operating margin, and management would even like to make acquisitions to take advantage of weak industry conditions to build on its national footprint — one that Huttig figures puts it in contact with 80% of national housing starts.
Management referred to its domestic footprint as “the smile,” for the way it reaches up both coasts and across the southern Sunbelt states. That’s a pleasant enough spin, but I found the reality of the matter somewhat concerning, since it means that Huttig has little share in the Midwest, yet it does have plenty of exposure to overheated housing markets in California and on the East Coast. Management does, however, plan on looking to the middle part of the country to consolidate market share. It sees plenty of potential in smaller, family-owned firms that it estimates control 44% of the two-step distribution market.
The Foolish final nail
Huttig ended its presentation by touting itself as one of the strongest players in the industry, with a “strong balance sheet to pursue growth.” Since its stock is trading well below its book value of $5.24 — the amount it calculated as of the end of the third quarter — it appears to leave a fair amount of downside protection in the shares. But until industry conditions show signs of bottoming out, I’d suggest stepping around Huttig for the time being. After that, it could be an interesting play as its long-term housing outlook plays out. Â Â
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Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.