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GMS Shares Decline More Than 13% on Q3 Earnings & Sales Miss

Zacks Equity Research

GMS Inc. GMS reported third-quarter of fiscal 2019 results, wherein earnings and sales missed the respective Zacks Consensus Estimate. Shares of the company lost more than 13%, following fiscal third-quarter earnings release on Mar 5.

Adjusted earnings of 41 cents per share missed the consensus mark of 54 cents by 24.1%. Nonetheless, the figure increased 13.9% on a year-over-year basis.

Net sales of $723.9 million missed the consensus mark of $740.8 million by 2.3%. However, the reported figure increased 23.6% from $585.5 million in the prior-year quarter. The improved results can be attributed to greater commercial activity, pricing improvement and acquisition synergy. Moreover, GMS achieved 6.6% organic sales growth, owing to broad-based improvement in sales across product groups.

GMS Inc. Price, Consensus and EPS Surprise

GMS Inc. Price, Consensus and EPS Surprise | GMS Inc. Quote

Product Line Details

Wallboard (accounting for 41.1% of total net sales) sales rose 16% year over year to $297.4 million, due to efficient pricing and acquisitions. On an organic basis, sales grew 3.9% from the prior-year quarter.

Ceilings (14.5%) sales increased 16.4% on a year-over-year basis to $105.2 million, driven by increased commercial business, efficient pricing system and benefits derived from acquisitions. Sales grew 10.6% year over year on an organic basis.

Steel Framing (16.2%) sales recorded a year-over-year increase of 21.4% to $117.4 million. Moreover, sales grew 13.1% from the year-ago quarter on an organic basis.

Sales of Other Products (28.2%) surged 43.6% from the prior-year period to $203.9 million. Sales grew 4.5% from a year ago on an organic basis.

Operating Highlights

GMS’ gross profit of $234.2 million grew 19.9% year over year in the said quarter, mainly due to higher sales from the acquisition of Titan and improved pricing system. However, gross margin contracted 100 basis points (bps) to 32.4% year over year, owing to higher product cost and an unfavourable product mix.

Adjusted selling, general and administrative expense, as a percentage of net sales, improved 210 bps to 24.2% in the quarter. The reduction of 130 bps primarily resulted from cost-reduction initiatives undertaken by the company along with contribution from acquisitions, partly offset by inflation in logistics. The remaining 80-bps improvement was due to a shift from accounting of operating lease to capital lease.

Adjusted EBITDA increased 41.5% year over year to $59.7 million. Adjusted EBITDA margin grew 100 bps to 8.2% in the quarter. The improvement was attributable to contribution from the Titan acquisition and focus on operational improvements.

Liquidity & Cash Flow

As of Jan 31, 2019, GMS’ cash and cash equivalents totaled $74.3 million compared with $52.9 million on Oct 31, 2018.

As of Jan 31, 2019, total debt amounted to $1.23 billion compared with $1.25 billion on Oct 31, 2018. The company generated free cash flow of $55.6 million in the reported quarter, reflecting an increase of 88.9% from the year-ago period.

The company repurchased $11.5 million or approximately 691,000 shares of common stock during third-quarter fiscal 2019. As of Jan 31, 2019, GMS had approximately $63.5 million of availability under the stock repurchase program.

Strategic Actions

During third-quarter fiscal 2019, the company opened a greenfield location in Stow, OH. It completed two acquisitions and opened four greenfield locations during the nine-month period of fiscal 2019.

On Mar 4, 2019, the company completed the acquisition of Commercial Builders Group, LLC in southern Louisiana.

Zacks Rank & Key Picks

Currently, GMS carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the Construction sector are Great Lakes Dredge & Dock Corporation GLDD, Altair Engineering Inc. ALTR and EMCOR Group, Inc. EME. While Great Lakes currently sports a Zacks Rank #1 (Strong Buy), both Altair Engineering and EMCOR carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Great Lakes, Altair Engineering and EMCOR’s earnings for the current year are expected to increase 27.8%, 58.6% and 6.9%, respectively.

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