Builders FirstSource, Inc.(“BLDR”) – The Investor Weekly Stock Report

Summary

Builders FirstSource (“BLDR”) manufactures structural and related building products for residential new construction in the United States.

The Company continues to deliver good news for investors.

-Established partnerships with customers, an optimized portfolio through tuck-in acquisitions, and an emphasis on cost management continue to produce higher profitability. The Company has posted five quarters of rising earnings growth. Sales growth has also increased over the same time frame.

BLDR is a leader in the construction products group and this group continues to show signs of strength. We remain bullish on the housing sector and believe that BLDR remains well positioned for growth in a highly fragmented market.

BLDR built a strong M&A campaign during 2021 that has improved the Company’s positioning and market share.

Builder’s FirstSource Company Overview

Founded in 1998 and based in Dallas, Texas, LDR manufactures and supplies building materials, manufactured components, and construction services to professional homebuilders, sub-contractors, remodelers, and consumers in the United States. The Company has four segments, based on geography.

Products include:
1. Lumber and lumber sheet goods
2. Manufactured products
3. Windows
4. Gypsum, roofing, insulation
5. Finishes

BLDR also provides turn-key framing, shell construction, design assistance and professional installation services.

Return vs S&P YTD
BLDR has returned more than > 100% over the past 12 months and there is still room to grow.

Builders FirstSource Trading Data

One Year Total Return

Year to Date Total Return

Builders FirstSource Financial Overview

December 15, 2021
Market Cap: $14.68 billion
Total Debt: $2.88 billion
Cash: $224.74 million
EV: $17.48 billion

Stock Data and Company Fundamentals

Leadership
David Flitman, CEO
Dave Flitman is president and CEO of Builders FirstSource, the largest supplier of building products for new residential construction, repair, and remodeling in the United States. In a previous role, he served as the president and CEO of BMC Stock Holdings Inc.

Peter Jackson, CFO
Peter Jackson is chief financial officer of Builders FirstSource. Prior to the merger of Builders FirstSource and BMC, Mr. Jackson served as the Builders FirstSource Chief Financial Officer.  He came to Builders FirstSource from Lennox International, Inc., where he served as the Global Refrigeration Segment CFO, the VP of finance – FP&A and M&A, and Heating & Cooling Segment CFO from 2007 – 2016. Before joining Lennox, Mr. Jackson held multiple financial leadership positions at SPX Corporation, General Electric, and Gerber Scientific after starting his career in public accounting.

Ownership

Top Rated Peers to Consider in the Building Construction Products Group
1. TopBuild Corp (“BLD”)
2. James Hardie Industries (“JHX”)
3. Trex Company (“TREX”)
4. Atkore (“ATKR”) see Atkore Buy List article LINK

Momentum Comparison – BLDR, TREX, FBHS, MAS, AOS, CSL

Growth Comparison – BLDR, TREX, FBHS, MAS, AOS, CSL

Building and Construction Materials

Markets
The success of BLDR is tied to the housing market. BLDR continues to benefit from the strength of the housing sector, as well as the migration out of large cities since the start of the Pandemic.

There are more single-family homes under construction across the country now than there have been at any point in the past 14 years. The U.S. is short 5.24 million homes, an increase of 1.4 million from the 2019 gap of 3.84 million, according to new research from Realtor.com.

Demand for single family housing continues to support top line growth. There is very high demand in manufacturing performance; not just in one geography, but across the country.

Risks
Commodity pricing
Labor shortages

Mitigating Factors include the following:
Tailwinds from commodities have allowed BLDR to continue to generate profitability and cash flow. A significant part of the product mix, around 37%, is exposed to commodity price movements.

BLDR’s manufactured components products remain sticky with customers because of the value proposition and benefits they offer customers.Acquisitions Strategy
BLDR completed 5 transactions in 2021.The Company is focused on reinvesting in the business to accelerate organic growth, while actively pursuing accretive tuck-in M&A opportunities. The strength of the balance sheet and cash flow generation will allow BLDR to remain a disciplined consolidator in this industry.

1. Digital Solutions
Builders FirstSource remains focused on innovation and enhancing digital solutions for customers. Recent digital solutions acquisitions will improve budgeting, workflows, processes, and design collaboration.

BLDR announced the acquisition of Apollo Software from Kattera, a construction automation

startup company, in September 2021. The tuck-in transaction was valued at $4.5 million.  This buyout will help Builders FirstSource in the field of design collaboration, construction budgeting, and field assignment with mobile functionality.

The month prior, on Aug 17, 2021, Builders FirstSource completed the acquisition of WTS Paradigm, LLC — a software solutions and services provider for the building products industry. In line with the recent acquisition, LLC, Apollo Software addresses inefficiencies in the process of digital home building. Both acquisitions will provide needed software to improve construction management capabilities.

2. Value-Added
The Company acquired CaliTruss, the largest truss manufacturer in California, which serves a large share of the US housing market.

In May, BLDR acquired Alliance. Alliance is the largest independently operated supplier of building materials in Arizona, primarily serving the greater Phoenix, Tucson, and Prescott Valley metropolitan areas.

Also in May 2021, the Company acquired the assets of John’s Lumber. John’s Lumber operates two locations serving the greater Detroit metropolitan statistical area (MSA), the No. 41 ranked single-family housing market in the country and home to nearly half the starts completed in the state of Michigan annually.

Third Quarter 2021 Results
– Sales grew 63% to $5.5 billion year-over-year.
– Gross profit expanded to 103% to a new quarterly record.
– Adjusted EBITDA more than doubled year-over-year to $976 million.
– EBITDA margin expanded by 930 basis points to a record 17.7%.
– Core organic growth was 16%.
– Free Cash Flow of $1.1 billion.
– Commodity price inflation benefited sales by 39% and acquisitions contributed another 8%. The primary driver in Q3 2021 sales, was the manufactured products and the lumber goods segments, which have increased by 94% and 106%, respectively. More than 60% of BLDR’s Base Business is non-commodity. And the majority of EBITDA growth is driven by value-added products and sustainable operations improvement.

The increase in net sales was attributable to BMC, via a merger completed in January 2021. Year-to-date the merger has realized $74 million in cost efficiencies, with 2021E estimated savings in the range of $110 million. The BMC deal has created an $11.2 building materials giant. The acquisition of the Raleigh, NC-based company closed the gap between BLDR, and No. 1 building materials supplier ABC Supply Co. The acquisition of BMC will allow the Company to increase its scale and better handle labor constraints in this sector of the economy.

Full Year Outlook
Net sales are expected in the range of $19.3 billion to $19.8 billion, which represents a 51% to 55% combined proforma net sales growth, year-over-year. Adjusted EBITDA is expected in the range of $2.85 billion to $2.95 billion, an increase of 166% to 176%.

Gross margins are expected to be steady at 26.5%, even without the benefits of the commodity inflation pass-thru.

Builders FirstSource Financials

Year-over-year revenue has grown at 128% and three-year revenue growth has been 32%.

Year-over-year EBITDA has grown at a CAGR of 367% and three-year EBITDA growth has been 77%.

Diluted EPS has grown at 37% over the past three years.

Buybacks
BLDR announced an additional $1B buyback plan, bringing their combined total for share repurchase programs to $2B.

Expanding Margins
BLDR has expanded profit margins for the past ten years. Investors should, however, be prepared for margin expansion to grow at a slower rate. Current Gross Profit margins are 28%.

Growing Free Cash Flow
Q3 2021 TTM free cash flow was $180 million. BLDR has used the cash flow to repurchase $565 million of its common stock during Q3. The Company announced an additional repurchase program of $1 billion, in combination with the remaining authorized $147 million.

Maintaining Liquidity
BLDR maintains $1.5 billion of liquidity, consisting of a $1.3 billion dollar revolver and $225 million in cash. The Company has no long-term debt maturities until 2027.

BLDR has a low net debt to EBITDA ratio of only 0.90. And its EBIT covers its interest expense, being 16.9 times the size. The Company grew its EBIT by 395% over twelve months. If maintained, that growth will make the debt even more manageable in the years ahead. 

BLDR – EPS Earnings Beats

BLDR does not pay a dividend.

Compound Annual Growth Rates (TTM) Summary

Recent News
On December 07, 2021 shared surged 8% after the Company provided investors with 2021 to 2025 long-term targets during the company’s investor day.

From 2021 to 2025, the company’s targets include 10% net sales compounded annual growth rate, 15% adjusted EBITDA CAGR, and 30% adjusted EPS CAGR.

EBITDA margins are expected to expand by 50 bps annually.

This is significant as it will grow 100 to 300 bps faster than the overall building supplier market.

CAPEX during this time is expected to be between $7 and $10 billion.

Valuation – Industrials Sector

BLDR appears to be fairly valued at this time, having risen nearly 97% YTD.

These is still upside, however, from a fundamental perspective.

The Company’s P/E Ratio is ~10.0x.

One dozen analyst firms including RBC Capital and Jefferies have reiterated “Buy” or “Outperform” ratings on Builders FirstSource.

BLDR’s EV/EBITDA is roughly 7.1x.

There are no material signs that the companies top-line growth is slowing down. And it is reasonable to expect that earnings will continue to increase into 2022 and beyond.

Builders FirstSource Price Target and Wall Street Ratings

The Investor Weekly built a position in Builder’s FirstSource at $55.10 on October 10, 2021. And as of the time of this writing, we are buying covered calls on the stock.

If BLDR was to sell off, and trade below $65, we would add to our position at that time, pending the nature of the news that prompted to drop.

Wall Street Ratings

Ratings and Analyst Breakdown

13 Analysts in the Last 90 Days

References

Barron’s
https://www.barrons.com/market-data/stocks/bldr

Bloomberg
https://www.bloomberg.com/quote/BLDR:US

Builders FirstSource
https://investors.bldr.com/news-releases/news-release-details/builders-firstsource-acquires-johns-lumber-gaining-distribution

https://investors.bldr.com/news-releases/news-release-details/builders-firstsource-acquires-california-trusframe-californias

https://investors.bldr.com/static-files/4bb91f4d-5e44-4ab7-9e79-11a7f24db874

CNBC
https://www.cnbc.com/2021/09/14/america-is-short-more-than-5-million-homes-study-says.html

MarketBeat.com
https://www.marketbeat.com/stocks/NASDAQ/BLDR/

MarketWatch
https://www.marketwatch.com/investing/stock/bldr

Motley Fool
https://www.fool.com/premium/company/NYSE/BLDR

Nasdaq
https://www.nasdaq.com/articles/is-builders-firstsource-nyse%3Abldr-using-too-much-debt

Investor’s Business Daily
https://research.investors.com/stock-quotes/nyse-builders-firstsource-inc-bldr.htm

Seeking Alpha Premium
https://seekingalpha.com/symbol/BLDR

Yahoo Finance
https://finance.yahoo.com/quote/BLDR

Disclosure
I am/we are long BLDR either through stock ownership, options, or other derivatives. 

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Nothing on this site nor any published commentary by The Investor Weekly is intended to be investment, tax, or legal advice or an offer to buy or sell securities. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and should not be considered a complete discussion of all factors and risks. Data quoted represents past performance, which is no guarantee of future results. Investing involves risk. Loss of principal is possible. Please consult with your investment, tax, or legal adviser regarding your individual circumstances before investing.