Investment Case Update: May 21, 2025
Market Capitalization: $1.3B
Enterprise Value: $2.3B
Price: $10.10 (5/21/25)
What the Company Does
MasterBrand is the largest manufacturer of residential kitchen and bath cabinets in North America, primarily serving the new home construction and repair and remodel (R&R) markets. MBC has an industry-leading dealer network comprised of over 7,700 cabinet dealers offering the most diverse product breadth, including pre-built and customized cabinets across the entire price spectrum. The company also sells its products directly to homebuilders as well as through retail partnerships with companies such as Home Depot and Lowe’s.
Why We Own It
Similar to BLDR, MBC is a category leader with strong growth prospects in the highly fragmented housing industry at a compelling valuation. Between 2019-2022, MBC grew its sales and Adjusted EBITDA at compound annual growth rates (CAGRs) of 11% and 17%, respectively, while also expanding EBITDA margins by nearly 190bps over this time period. Although a more diverse product portfolio is typically associated with increased costs and complexities, MBC has made significant strides in streamlining its manufacturing process by optimizing its manufacturing plant footprint, using more standardized product components, and deploying automation technology to take out costs and improve efficiency. The company also leverages end market insights from its massive dealer network, while also working closely with its retail partners to manage inventory and more accurately match production with demand, allowing the company to preserve (or grow) margins even as demand slows. Despite an ~18% drawdown from peak sales over the last two years due to a difficult housing market backdrop, MBC has expanded EBITDA margins by another 90bps over this period.
Management expects the company to grow its top line at a 5% CAGR over the long-term, outpacing expected industry growth of 4%, while also achieving Adjusted EBITDA margins of 17%, implying margin expansion of ~350bps from 2024 results. Although management now expects a low-single-digit revenue decline and EBITDA margin contraction of ~72bps in FY25, if MBC is able to grow on top of FY25 expected results at its targeted 5% top-line growth rate with annual margin expansion of 45bps between FY26-FY30 (implies FY30 margins of 15.0%), MBC could offer nearly 69% upside without assuming any multiple expansion from its current undemanding EV/EBITDA multiple of 6.3x. MBC also offers a trailing twelve-month free cash flow (FCF) yield of 12% compared to peers (AMWD, JELD, MHK, FBIN, BLDR, GFF, AWI) with FCF yields ranging from 3-11%.
How Management Allocates Capital
Management’s top two capital allocation priorities are currently: 1) investing in the business for future growth, especially in the company’s initiative to modernize its technology foundation and 2) fortifying the company’s balance sheet. MBC ended the quarter with a net debt to Adjusted EBITDA leverage ratio of 2.7x and expects to get below 2x by the end of 2025. Although M&A has historically been a vital piece of MBC’s blueprint to consolidate the cabinet market, management plans to deploy a disciplined approach to M&A in the near term as they sit above their leverage target and work on integrating their recent (July 2024) acquisition of Supreme Cabinetry Brands. Meanwhile, management expects to opportunistically tap into its new $50MM share buyback program, or ~3.9% of the company’s market cap.