On Monday, Loop Capital adjusted its financial outlook for GMS Inc . (NYSE:GMS), a company specializing in the distribution of construction products. Despite lowering the EBITDA forecasts for the second quarter of fiscal year 2025 (2Q25) and the full fiscal year 2025 (FY25), the firm increased GMS's price target from $85.00 to $93.00, while maintaining a Hold rating on the stock.
The revision in EBITDA estimates comes as a result of a more conservative approach towards wallboard volume, steel framing pricing, and margin assumptions. The industry has faced challenges including the impact of recent hurricanes in the Southeast and a slowdown in new single-family construction starting in October. These factors have led to a reduction in the October quarter wallboard volume forecast by 3%, as opposed to the previously estimated 2%.
Furthermore, the second half of fiscal year 2025 (2H25) is expected to witness subdued wallboard volume, as industry contacts anticipate several quarters of weaker demand. This is attributed to a slowdown in housing completions. Additionally, steel framing prices have been declining, with further decreases expected after November price increases did not gain traction.
Distributors have also struggled to fully offset manufacturer price increases from earlier in the year, which poses a risk to GMS's gross margin guidance of 31.6-31.8% for the October quarter. Consequently, the revised EBITDA forecasts for 2Q25, FY25, and fiscal year 2026 (FY26) are now set at $158 million (a decrease of $2 million), $587 million (a decrease of $11 million), and $624 million (a decrease of $6 million), respectively.
Despite the reduced estimates, Loop Capital's decision to raise the price target to $93 is based on an 8x multiple of the projected FY26 EBITDA, reflecting higher market multiples across the building products sector. This anticipation is in line with expectations of a rate-driven resurgence in residential demand next year. However, the firm cautions that there may be near-term downside risks to earnings following the recent improvement in GMS's share price.
In other recent news, GMS Inc. reported mixed Q1 results, with a 2.8% increase in net sales to $1.45 billion, but a decline in net income to $57.2 million. The company’s shareholders also approved board nominees and executive compensation, and Ernst & Young LLP was ratified as the company's independent registered public accounting firm for the fiscal year ending April 30, 2025. In other developments, Loop Capital maintained its Hold rating on GMS stock, citing ongoing margin headwinds and the failure of expected improvements due to steel framing price increases to materialize.
Meanwhile, General Motors (NYSE:GM)' autonomous vehicle subsidiary, Cruise, settled with the National Highway Traffic Safety Administration (NHTSA) for a $1.5 million fine over a failure to report a serious incident. Cruise also announced plans to initiate supervised testing of up to five autonomous vehicles in California's Bay Area, marking a significant step in their progress.
InvestingPro Insights
Recent data from InvestingPro adds context to Loop Capital's analysis of GMS Inc. The company's market capitalization stands at $4 billion, with a P/E ratio of 16.41, suggesting a relatively moderate valuation compared to some peers in the construction products sector. GMS has demonstrated strong financial performance, with revenue reaching $5.54 billion in the last twelve months as of Q1 2025, representing a 3% growth.
InvestingPro Tips highlight that GMS has been profitable over the last twelve months and analysts predict continued profitability this year. This aligns with Loop Capital's adjusted EBITDA forecasts, albeit at reduced levels. The stock's strong return over the last year, with a 50.62% price total return, reflects investor confidence despite the challenges noted in the article.
It's worth noting that GMS's stock price is trading near its 52-week high, with the current price at 98.2% of the 52-week high. This performance, coupled with the company's liquid assets exceeding short-term obligations, suggests financial stability amidst the industry headwinds mentioned in the report.
For investors seeking a more comprehensive analysis, InvestingPro offers 11 additional tips for GMS, providing a deeper understanding of the company's financial health and market position.
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