Why USG's L&W Sale Affects GMS

The USG Corporation (NYSE: USG)'s sale of its captive wallboard distributor L&W to ABC Supply is "optically positive" for GMS Inc (NYSE: GMS), according to a Baird research note.

However, the sale will make ABC more competitive in the wallboard distribution over the long term, as it may push L&W aggressively into residential markets using scale, relationships and operational excellence.

Notably, ABC Supply holds the No. 1 share in the roofing market and leading positions in a variety of complementary building products.

Related Link: USG Should Have Some Cash On Hand To Return To Shareholders In The Near Future

"ABC's supplier strategy has historically been to use scale to develop very tight relationships with key suppliers. This could give ABC an even stronger competitive advantage with USG products (historically, GMS's largest wallboard suppliers are National Gypsum and CertainTeed)," analyst David Manthey wrote in a note.

As such, Manthey said the transaction is neutral at best for GMS.

The analyst maintains his Neutral rating on GMS given balanced risk/reward, potential uncertainty around near-term wallboard pricing, weather-related modeling risk and shifting competitive sands.

At time of writing, shares of GMS fell 4.13 percent to $23.92. Manthey has a price target of $25 on the stock.

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