Building services and installation company TopBuild (NYSE:BLD) missed Wall Street’s revenue expectations in Q3 CY2024 as sales rose 3.6% year on year to $1.37 billion. The company’s full-year revenue guidance of $5.33 billion at the midpoint came in 1.3% below analysts’ estimates. Its non-GAAP profit of $5.68 per share was 1.8% above analysts’ consensus estimates.

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“We delivered a strong performance with third quarter sales of $1.37 billion and adjusted EBITDA of $285 million, achieving the highest level of quarterly sales and profit in our history,” said Robert Buck, President and Chief Executive Officer.

Company Overview

Established in 2015 following a spinoff from Masco Corporation, TopBuild (NYSE:BLD) is a distributor and installer of insulation and other building products.

Home Builders

Traditionally, homebuilders have built competitive advantages with economies of scale that lead to advantaged purchasing and brand recognition among consumers. Aesthetic trends have always been important in the space, but more recently, energy efficiency and conservation are driving innovation. However, these companies are still at the whim of the macro, specifically interest rates that heavily impact new and existing home sales. In fact, homebuilders are one of the most cyclical subsectors within industrials.

Sales Growth

Examining a company’s long-term performance can provide clues about its business quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, TopBuild grew its sales at an incredible 15.3% compounded annual growth rate. This is a great starting point for our analysis because it shows TopBuild’s offerings resonate with customers.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. TopBuild’s recent history shows its demand slowed significantly as its annualized revenue growth of 5% over the last two years is well below its five-year trend.

This quarter, TopBuild’s revenue grew 3.6% year on year to $1.37 billion, falling short of Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 4.4% over the next 12 months, similar to its two-year rate. This projection is underwhelming and shows the market thinks its newer products and services will not catalyze better top-line performance yet. At least the company is tracking well in other measures of financial health.

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Operating Margin

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses–everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

TopBuild has been an optimally-run company over the last five years. It was one of the more profitable businesses in the industrials sector, boasting an average operating margin of 15.4%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.

Analyzing the trend in its profitability, TopBuild’s annual operating margin rose by 4.1 percentage points over the last five years, as its sales growth gave it operating leverage.

In Q3, TopBuild generated an operating profit margin of 17.8%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Earnings Per Share

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth was profitable.

TopBuild’s EPS grew at an astounding 31.6% compounded annual growth rate over the last five years, higher than its 15.3% annualized revenue growth. This tells us the company became more profitable as it expanded.

Diving into the nuances of TopBuild’s earnings can give us a better understanding of its performance. As we mentioned earlier, TopBuild’s operating margin was flat this quarter but expanded by 4.1 percentage points over the last five years. On top of that, its share count shrank by 12.9%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

Like with revenue, we analyze EPS over a more recent period because it can give insight into an emerging theme or development for the business.

In Q3, TopBuild reported EPS at $5.68, up from $5.43 in the same quarter last year. This print beat analysts’ estimates by 1.8%. Over the next 12 months, Wall Street expects TopBuild’s full-year EPS of $20.60 to grow by 7.4%.

Key Takeaways from TopBuild’s Q3 Results

We struggled to find many strong positives in these results. Its revenue missed and its EBITDA guidance for the full year fell short of Wall Street’s estimates. Overall, this was a softer quarter. The stock remained flat at $362.13 immediately after reporting.

Is TopBuild an attractive investment opportunity at the current price? When making that decision, it’s important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it’s free.