what did Warren Buffett see in Simpson Manufacturing?
The next time you find yourself at the site of a half-built home, direct your attention to the joints of its wooden frame. You’ll notice a variety of nondescript steel components tying the planks together and anchoring them to the ground. There’s a better chance than not that those are made by Simpson Manufacturing, a company whose sizeable $8bn market cap and ubiquitous presence in residential construction stand in puzzling contrast to its obscure reputation within the investment community.
Barclay Simpson was just 3 credits shy of his business degree when he dropped out of UC Berkeley in 1946 to take the reigns at Simpson Screen Company, a window screen manufacturer with $100k in revenue that his father, Walter, founded in 1914 and was at that point being run into the ground by Walter’s oldest son and appointed successor. Upon assuming control, Barc expanded to other residential products and exited window screens in 1949 as its kitchen fans gained traction at Sears and Montgomery Ward. At the same time, in pursuit of metal fabrication contracts, he invested in new equipment, including a 60-ton press, which came in handy one evening in 1956, when Warner Odenthal, a neighbor’s brother, who had heard about Simpson’s press machine, placed an order for 25k joist hangers, a type of metal connector used to bind the ends of beams supporting the roofs of warehouses and other commercial structures. With that, the Simpson Manufacturing we know today was born.
About this fortuitous event, Barclay once remarked, “then, something happened that proved that it was better to be lucky than smart”. But if the origin of Simpson Strong-Tie (as the company then came to be known) was a matter of luck, its subsequent development was anything but. With building codes neither systematized nor enforced even as the country found itself in the midst of a massive post-War construction boom, Barclay spied an opportunity to weave highly engineered connectors into building specifications, particularly in California, which he correctly predicted would come to adopt ever stricter construction standards to withstand earthquakes. Even today, connectors are disproportionately featured in regions of the country prone to natural disaster. A house in coastal Florida or California can have 10x more Simpson content than one in Michigan.
Beyond piecemeal sales of bent metal components, Barclay envisioned a collection of load bearing connectors – replacing the ad hoc, disjointed collection of nails and screws widely in use at the time – that would distribute forces from a building’s frame to its foundation. Architects could adopt this interconnected system to design open floorplans, unobstructed by intrusive load-bearing walls and beams1.
Source: Made-In-China
Today, Simpson sells ~14k varieties of wood connectors, each tailored to different applications and load requirements. The company claims around 75% share of the North American market. Mitek is thought to hold a significant share of the remainder, which is otherwise scattered across private label brands that compete primarily on the basis of price.
Complementing their connectors is a wide menu of fasteners (screws and nails, basically). While most of the fastener SKUs that Simpson sells are standard components sourced offshore from third parties (it needs to supply a comprehensive breadth of screws and nails to win placement at Home Depot and Lowes), the vast majority of fastener revenue comes from code-approved varieties manufactured in-house, some of which are designed in conjunction with certain connectors, with the combination sold as a package. Even for connectors that work with standard nails, Simpson’s specialized screws will more reliably bear heavier loads. Together, connectors and fasteners comprise the near entirety of Simpson’s Wood Construction segment, which itself accounts for 84% of total revenue and even more of profits.