The homebuilding industry is short labor - we like the distributors - PowerPoint PPT Presentation

▪ We have initiated coverage of 4 companies in the building products distribution and installation industry (collectively “distributors”) ▪ The homebuilding industry is short labor - we like the distributors because they provide partial solutions to this challenge ▪ In 2020, we believe the distributors will have pricing power as housing starts accelerate and labor shortages worsen ▪ Our Buys are BLDR and IBP because we believe consensus is underestimating each company’s ability to take advantage of improving starts ▪ We believe these stocks can outperform in 2020 as revenue and EPS growth beat expectations and consensus estimates move higher ▪ Valuation is supportive here – the multiples for both stocks are below their 4 year averages ▪ Builders FirstSource (BLDR), Buy $31 PT, Mkt Cap: $2.6B ▪ BMC Stock Holdings (BMCH), Neutral, Mkt Cap: $2.0B ▪ Installed Building Products (IBP), Buy $87 PT, Mkt Cap: $2.4B ▪ TopBuild (BLD), Neutral, Mkt Cap: $3.4B 2 BTIG Building Products Distribution & Installation Initiation 02/28/2020

Priced 02/28/20 Market Data 52-Week Range Price Change EPS Estimates Valuation Market Enterprise 90D % Off % Off BTIG Consensus EV/EBITDA Price Share Price Cap Value ADTV Company Ticker Rating Target High Low High Low 2018 2018 YTD LTM 2019A 2019A 2020 2020 2021 2021 2019 2019 2020 2020 2021 2021 NTM 2020 2020 2021 2021 ($M) ($M) (000s) Lumber and Building Materials Builders FirstSource BLDR Buy $31.00 $22.71 $2,637 $3,976 1,272 $28.43 $28.43 -20% -20% -50% 108% 63% $1.90 $2.16 $2.80 $1.90 $2.17 $2.45 7.0x 7.0x 6.4x BMC Stock Holdings BMCH Neutral NA $24.53 $1,637 $1,977 356 $31.67 $31.67 -23% -23% -39% 58% 28% $1.63 $1.90 $2.07 $1.63 $1.92 $2.15 6.9x 6.9x 6.5x Insulation Installation TopBuild BLD Neutral NA $101.00 $3,382 $3,930 304 $125.66 $125.66 -20% -20% -41% 124% 70% $5.56 $6.29 $7.09 $5.56 $6.30 $7.14 9.8x 9.8x 9.0x Installed Building Products IBP Buy $87.00 $66.05 $1,983 $2,426 225 $80.25 $80.25 -18% -18% -56% 96% 51% $2.28 $3.16 $3.90 $2.28 $2.98 $3.58 10.7x 10.7x 9.7x Revenue Growth Adjusted EBITDA Growth Diluted EPS Growth 2019 2019 2020 2020 2021 2021 2019 2019 2020 2020 2021 2021 2019 2019 2020 2020 2021 2021 BTIG Con. BTIG Con. BTIG Con. BTIG Con. BTIG Con. BTIG Con. BTIG Con. BTIG Con. BTIG Con. Lumber and Building Materials Builders FirstSource (BLDR) -5.8% -5.8% 12.0% 9.9% 7.0% 5.3% 2.9% 2.3% 11.5% 10.3% 13.1% 10.3% 7.7% 7.9% 14.2% 14.0% 29.5% 13.2% BMC Stock Holdings (BMCH) -1.5% -1.2% 9.8% 8.4% 5.1% 4.6% -2.4% -3.0% 10.4% 10.5% 5.9% 7.2% -7.7% -7.8% 16.3% 17.6% 9.0% 11.9% Insulation Installation TopBuild (BLD) 10.1% 10.7% 7.0% 6.3% 6.2% 5.1% 27.0% 31.8% 11.7% 11.8% 10.2% 9.0% 46.8% 46.9% 13.2% 13.4% 12.8% 13.2% Installed Building Products (IBP) 13.1% 12.5% 11.7% 11.6% 9.0% 7.3% 19.7% 17.3% 18.6% 17.6% 14.0% 10.3% 30.2% 30.1% 38.3% 30.7% 23.6% 20.1% *BTIG does not provide price targets on Neutral-Rated Stocks Note: EV/EBITDA is calculated using 4Q19 total debt and cash estimates and consensus EBITDA estimates Source: FactSet, Company Filings, BTIG Research 3 BTIG Building Products Distribution & Installation Initiation 02/28/2020

▪ Mac acro View: We forecast mid-single digit single family starts growth in 2020, driven by higher mix of entry-level ▪ Improvement exacerbates ongoing labor shortage challenges ▪ Our ur cov overage com ompanie ies offer par parti tial l solu solutio tions to to labor iss ssue – structural components and a national in-house insulation installer employee base - and can leverage a tighter labor market to raise price and expand margin ▪ In n Lum Lumber and nd Buil uildin ing Materia ials ls (LBM), we believe that the structural components category will outgrow the overall market as homebuilders increasingly adopt products that reduce framing labor requirements and construction cycle times ▪ BUT sm smal alle ler ho houses als lso ne need less lum umber, mi millw llwork, k, do door ors, and wi wind ndows. We expect these products to undergrow in 2020 ▪ In n ins nsula latio ion, the dominant players (our coverage) have pricing power as starts move higher ▪ Insulation is ~2% of cost to construct a home, so as insulation prices rise, installers can pass it through and grow margin ▪ After a strong 2019 for the stocks, we believe there is further appreciation ahead: ▪ Distributors are 78% correlated to starts, which we expect to grow in 2020 ▪ We believe EPS growth will growth in 2020 on both stronger top line AND margin expansion ▪ Stocks currently trade at 7% below 2016-current average multiples 4 BTIG Building Products Distribution & Installation Initiation 02/28/2020

▪ Lu Lumbe ber r and and Buil Building ding Ma Materia rials ls (LBM) LBM) Dis istrib ibut utors: s: ▪ BU BUY Buil Builde ders s Fi FirstSource (BLD BLDR, $3 $31 1 PT) T): Consensus underestimates the impact that BLDR’s investments in structural component capacity on 2020 and 2021 earnings growth as adoption of structural components grows – 37 37% up upsi side de to o PT ▪ Neu Neutral l BMC BMC St Stoc ock Holdin Holdings s (BMC BMCH): ): We believe geographic concentration in CA and WA as well as product concentration in windows, doors, and millwork limits growth potential ▪ Insula nsulation ion Ins nstalle llers: ▪ BU BUY Ins nstalle lled d Buil Buildin ding Prod oducts (IBP BP, $8 $87 7 PT) T): Consensus underestimates IBP’s incremental margin growth potential. After 2.5 years of lagging, we believe IBP’s incremental margins are just beginning to rebound into the 20-25% guidance range – 32% % up upside ide to o PT ▪ Neutral Neu l Top opBu Build ild (BLD BLD): We believe incremental margin is at the tail-end of its outperformance period and do not believe the stock can outperform if margins decelerate 5 BTIG Building Products Distribution & Installation Initiation 02/28/2020

▪ Strong 2019 appreciation, more volatile than Annual Stock Performance of Distributors, Homebuilders, & S&P 500 homebuilders 140% Distributors Homebuilders S&P 500 113% 120% 100% 81% 71% 80% 51% 60% 37% 29% 40% 24% 19% 10% 20% 6% 3% 0% 0% -1% -20% -6% -8% -9% -40% -34% -60% -46% 2015 2016 2017 2018 2019 2020 ytd Distributor Correlation to Starts, Commodities, 10yr ▪ Highly correlated to single family housing starts (78%) Starts Commodities 10yr Yield 100% ▪ Less correlated to underlying material prices (54%) 87% 86% 83% 80% ▪ Not correlated to interest rates (9%) 63% 58% 55% 60% 53% 43% 40% 25% 20% 13% 8% 0% -11% -20% BLD BLDR BMCH IBP Sources: FactSet, Census, Company Filings, BTIG Research 6 BTIG Building Products Distribution & Installation Initiation 02/28/2020

▪ We value distributors on an EV/EBITDA basis LBM and Insulation EV/EBITDA Multiples 10.0x 15.0x ▪ LBM is trading at 7x, insulation is trading at 10x 14.0x 9.0x 13.0x 12.0x ▪ 8.0x We believe re-accelerating starts can support 11.0x 7.0x 10.0x valuation 9.0x 6.0x 8.0x LBM (LHS) Insulation (RHS) 7.0x ▪ 5.0x Group is 7% below 4 year average valuation 6.0x 4.0x 5.0x EV/NTM EBITDA Valuation Methodology NTM Adj EBITDA Multiple Enterprise Total Total Equity Shares PT / Fair Price Delta Value Debt Cash Value Out Value LBM BLDR 575.5 8.6x 4,949.5 1,352.9 14.1 3,610.7 115.9 $31.00 $22.71 36.5% BMCH 286.5 8.0x 2,292.0 505.5 165.5 1,951.9 66.8 $29.00 $24.53 18.2% Insulation BLD 399.9 11.1x 4,438.8 732.2 184.8 3,891.4 33.3 $117.00 $101.00 15.8% IBP 233.4 13.0x 3,034.0 620.8 177.9 2,591.1 29.8 $87.00 $66.05 31.7% Sources: FactSet, Company Filings, BTIG Research 7 BTIG Building Products Distribution & Installation Initiation 02/28/2020

LBM Distribution Value Chain LBM Distribution On-siteConstruction Building Product Manufacturing Process Distributed Products Home Framing Raw Material Building Product Manufacturer Subs Builder Value-Add Products Construction Services Insulation Installation Value Chain On-siteConstruction Insulation Manufacturing Process Insulation Installation Home Insulation Raw Material Insulation Manufacturer Insulation Branches Builder Installers Sources: BTIG Research 8 BTIG Building Products Distribution & Installation Initiation 02/28/2020