TRG | The Bottom Line – 2/24

This week’s volatile weather was indicative of a decidedly choppy stock market, from summer-like 80 degrees in New Orleans on Fat Tuesday to snow falling near the fabled Hollywood sign by the end of the week. Against this backdrop, Q4’22 earnings season progresses with varied feedback from key building product and materials companies this week. Home Depot (HD) stock slipped (down ~2% intraday vs. a flattish to down S&P 500) as the Street focused on flat comp sales and a mid-single digit decline in EPS (with weakest comps in 1H’23). From our perspective, what was telling about HD earnings was the continued trend of Pro outpacing DIY, an indication that resi renovations are still moving forward. We continue to maintain that visibility to stabilization of interest rates will help to bolster new home sales, and amid continued uncertainty, there is a greater propensity to stay put and work with what you have. Exterior building products supplier Beacon Building Products (BECN), on the other hand, rallied ~9% on earnings this Friday vs. a ~1% dip in the S&P 500 despite an earnings miss and  tepid volume outlook. What stood out to us is BECN’s solid free cash position, generating $320MM in Q4’22 and 2H’22 of ~$600MM, resulting in FCF yield in the high single digits on a % basis. Overall, this confirms that cash remains king and asset-light models with clean balance sheets and strong cash generation should and will warrant higher relative valuations in the current market.