Installed Building Products (“IBP”) is a Columbus, Ohio-based installer of insulation systems and other building products. The Company was founded in 1977 with one location in Columbus and today generates over US$1 billion in sales from 125 locations across 48 states. IBP generates about 75% of its revenue from the residential market, 18% from the commercial market, and 7% from repairs and remodels.
Pembroke has followed IBP since its 2014 initial public offering and met management numerous times. After a small initial investment in November 2016, Pembroke portfolio managers (“PMs”) scheduled interviews in April with management at IBP’s Columbus headquarters. The team met with the CEO, COO, President of External Affairs, SVP Finance, and the company’s mid-west regional manager during a plant tour. The visits reinforced Pembroke’s view that:
- IBP is managed by a competent and complementary team;
- IBP is an efficient, high-quality construction business;
- Multiple drivers have created a long runway for revenue growth and margin expansion;
- There is compelling risk-adjusted upside potential in the shares.
Jeff Edwards, the CEO, assumed control of IBP from his father in 2004 and has taken the business to the next level. Most of the company’s expansion and the assembly of the current management team occurred on Jeff’s watch. Pembroke saw no weak links or visible egos on this team. Each team member conveys intelligence and credibility and appears committed to growing the business in the shareholders’ best interests. That is only sensible as management owns about 30% of the equity.
Though insulation installation may present itself as an uninteresting and labor-intensive business, IBP is one of the finest construction services firms the PMs have encountered. This is due, in part, to their position in the value chain. IBP sits between a fragmented customer base (the thousands of homebuilders in the country; among whom the top five control about 10%), and four insulation manufacturers. IBP is one of only two large insulation installers in the country that each control 20%-25% of the market and benefits from much cheaper insulation pricing than smaller competitors. This structural advantage and benign competitive environment is evident in their returns: 25%-30% return on equity, and 14%-15% return on invested capital. IBP turns their insulation inventory more than ten times per year.
IBP’s business has many channels for growth including residential product extensions, additional M&A, commercial branch expansion and continued cyclical expansion. Single-family housing starts are still 30%-40% below historically observed levels and we expect them to continue to recover like other pillars of the US economy.
Pembroke saw first-hand how residential product extensions represent an interesting upside to growth. IBP’s Columbus branch installs the full range of building products including insulation, gutters, garage doors, shower doors, mirrors and water-proofing. The plan to roll these products out to additional locations is one reason for our belief in the company’s growth potential.
IBP’s products appear in about 60% of U.S. single family home permits.