Is Builders a Buy?
For those of you who aren’t familiar with Builders FirstSource (BLDR), they are America’s largest supplier of structural building products, value-added components and services for the professional construction industry. They have a nationwide presence and a reputation for the reliability and durability of their products. A constant theme throughout the report will be the pressures of the current economic climate and what this means for BLDR in the coming future. The Company operates approximately 565 locations in 42 states across the United States and with lots of recent M&A activities they are continually expanding which should enhance long-term growth.
A good place to start when predicting BLDR’s future earnings is to have a look at the most recent historical earnings figures and revenue streams.
BLRD Revenue and Profits rising, Source: TIKR
As we can see there was a huge jump in revenue and gross profit from 2020 to 2021. This can somewhat be attributed to the small boom in DIY home renovations across the US, largely funded by fiscal stimulus packages. The irony of this is that the biggest challenge BLDR will face over the coming quarters is the looming recession that has partly come as a result of surging inflation off the back of these large stimulus packages. However, before looking more into the challenges of the current economic climate it is important to focus on the sustainability of BLDR’s revenue streams and profits.
A key metric that I feel helps to point to the sustainability of BLDR’s profits is their strong Return on Invested Capital (ROIC) metric of 27% for the last fiscal year. This ROIC figure has been over 10% for the last 5 years which shows BLDR to be a strong, healthy company who are constantly turning not only shareholder capital but all reinvested capital that is running through the company into profits. Analysts have been questioning the growth of BLDR and the insinuation is that the company will be unable to maintain the levels of revenue it reached in 2021. Whilst this might be true, we only need to look at how profitable the business has been over the course of the last 5 years as reassurance that even a minor blip or drop in growth over the next few quarters would still leave BLDR in a healthy position. The major worry is that recent M&A activity has not only exaggerated revenue growth from 2020 to 2021 but it has also loaded debt onto the company.
BLDR ROC is booming, Source: TIKR
BLDR has a very impressive earnings per share metric of 14.18 and a great Earnings Per Share (EPS) track record vs analysts’ estimates. Outperforming analysts’ expectations is something that BLDR will have to do if they are to continue having positive growth in the near to mid future but if their track record is anything to go by, they might just do it! BLDR’s operational income has grown to reach $3.6 Bn LTM showing the huge scale that the company is operating on alongside the profitability of the business model. BLDR flaunts impressive EV/EBITDA and EV/Revenue multiples of 4.97x and 0.64x respectively. These are some of the best multiples across the US building supplies industry and with recent M&A activity furthering their dominance, BLDR is the main stock I would be looking to add to my portfolio for exposure to the construction industry.
BLRD has a great valuation compared to competitors, Source: TIKR
Perhaps the more prevalent question then is if this is the best time to add construction/building supply companies, more specifically BLDR, to a portfolio. The complications surrounding the current economic climate have been well documented and there are some excellent articles on the Spark website in recent weeks explaining this if you want to read more. If we look at the last major recession, in 2008, the construction and building sector sunk to unimaginable lows with house prices falling 16% in one year. In the case of BLDR, their fourth quarter of 2008 saw sales drop 30.6% from that of its sales in the fourth quarter of 2007. Although the financial crash of 2008 was directly linked to the construction and housing market and not the inflationary issues surrounding today, one cannot simply proceed without caution when anticipating the future of the industry.
Potentially more pressing is the level of debt that BLDR has put on with its recent M&A activity. The acquisition of BMC drove long-term debt levels up from $1.5bn in December 2020 to $3.5bn in the most recent quarter. With rising inflation, this debt is going to get more expensive and it could begin to cripple the firm’s cash reserves as we move into the looming recession. The goodwill levels, which suggest the intangible value added by these mergers, also rose significantly along with debt. This could be perceived as how much BLDR overpaid for the acquisition. BMC had net sales of $3.6 billion in 2019 and provide lots of value-added benefits to BLDR’s business model such as installation management and an innovative eBusiness platform. Over a prolonged period, I definitely see the benefits of the unique intangibles and acquiring market share but with the inflationary pressures in place at the minute this extra debt they have taken on could prove costly. BLDR has also, in the last few weeks, acquired Trussway which will further impact the balance sheet and is definitely something to be monitored with the next quarter’s results.
Another major factor to consider is the exposure to the US Dollar that comes with buying BLDR stock. The US dollar is currently at its highest level in relation to EUR and GBP in decades and would appear to be a lucrative reason for investors to gravitate towards US equities over any others. The only issue with this is, if I acquired BLDR stock now, with a medium to long-term time horizon, I am entering the market at this higher level and if the USD begins to depreciate, so will my profits as an investor. Although these currency exposures within equities are something I wouldn’t have needed to dwell on in too much detail in recent years, given the current turmoil in the currency markets it is something I must pay close attention to when analysing global equities.
BLDR Debt and Goodwill, Source: TIKR
BLDR has taken on a huge share buyback scheme over the last year. In 2021 BLDR bought back over $1.7bn worth of stock at what they believed to be an undervalued price. BLDR has doubled down on this policy, and with the stock price dropping even further they have decided to buy back a whopping $3bn worth of stock. For a company with a current market cap of around $8.5bn, this is a huge statement of intent and shows how much the company believes the current stock price to be undervalued. Whilst this share buyback program points to a positive future and growth outlook for the company, what is a bit worrying is that they didn’t use any of the retained cash to pay off some of the large amounts of debt they have taken on from the recent mergers. Inflation has allowed BLDR to charge some higher prices for their goods and services and if demand starts to drop in the coming months and they lose this extra cash flow coming through the business they could be left in a position of wishing they had held on to a bit more of their retained earnings.
BLDR stock repurchases, Source: TIKR
BLDR is a company that prides itself on a vibrant work culture and a strong emphasis on corporate responsibility. BLDR is keen on ensuring that customers are safe, especially with a lot of their installation services. The Builders FirstSource Safety and Health Program provides the framework in which consumers can mitigate these risks, which is important as it will help prevent large-scale lawsuits and complications against the firm. BLDR was voted first amongst peers for Gender representation on comparably.com and it is positive to see BLDR pioneering the presence of women in the construction industry. The score was not as high for diversity but this is seen to be improving with more than 50% of employees coming outside of the white ethnicity. BLDR also has a major focus on sustainable building practices with new ‘READY-FRAME®’ products that improve efficiency and reduce waste. This will not only attract new customers but also improve the longevity of their products.
BLDR is a solid company with a profitable core business structure and model. I also like where the company is headed with its growth strategies. The recent M&A activity, in my opinion, is a good use of the increased revenue streams from recent years and is allowing BLDR to get a firm grasp on the market. I feel there is a lot of upside for BLDR with a 3-year target price of $133.79 based on intrinsic values and future predicted cash flows for the company, this is a 130% gain from current levels. This is impressive considering the cash flows account for negative revenue growth of -16% from 2022-2023, helping to put a more conservative estimate on growth, aligned with analysts’ estimates. The main issue I have is the current uncertainty with the economic climate and with a market beta of 2.2, it would be naïve to overlook this. The housing market is a fragile one and could be one of the worst affected sectors if the US is to head into a major recession. With the debt BLDR has also loaded on in recent years it could be seen as a potential leveraged play on the housing market. This personally, is not something I’d feel totally comfortable with taking right now but as the future becomes a bit clearer and if we get signs that this recession may not be as severe as some are predicting, I would consider buying BLDR.
Until next time,
Euan McNicholl
Disclaimer
This communication is for informational and educational purposes only and should not be taken nor used as investment advice, as a personal recommendation, or solicitation to buy or sell any financial instrument. This material has been prepared without considering any particular recipient’s investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or structured product are not, and should not be taken as, a reliable indicator of future performance. I assume no liability as to the accuracy or completeness of the content of this publication.