Builders FirstSource Builds On Housing Trends

Builders FirstSource Hits New High But Shares May Have Peaked 

Between the strength in the housing market and strength in the remodel/upgrade market it really isn’t surprising to see Builders FirstSource (NASDAQ: BLDR) doing so well. The company is firmly positioned as a go-to source for all the necessary materials for both new and add-on construction making it a high-demand business in an actively accelerating market. The latest data on permits and starts suggests the trends will continue as well, with permits up 30% and starts up 37% YOY, and demand is still building within the market. The problem for us is that share prices just hit a new high with very shaky technicals that make us think we can get this stock at a lower price with a little bit of patience. 

Builders FirstSource Absolutely Crushes The Consensus 

Builders FirstSource blew right through the consensus with $4.2 billion in net revenue. The 134.6% YOY gain beat the consensus by 1080 basis points as well, and is the result of acquisition compounded by robust organic growth. At the core level, organic growth topped 20% for the quarter on strong demand from the housing market, rising commodity prices, and the impact of the BMC acquisition. The acquisition closed in January and worth roughly 70% in terms of quarterly growth. On an adjusted basis, assuming the companies were merged last year, growth is closer to 54% and still quite robust. 

Earnings, also on an adjusted basis, were also impressive. The company was able to leverage not only its acquisitional opportunities but lower its SG&A in relation to the net. This results in a 52.1% increase in gross profit and a 187% increase in adjusted EBITDA. On the bottom line, the $0.83 in GAAP earnings beat by $0.14 while the adjusted $1.10 beat by $0.37. 

The company gave us some favorable guidance but we think they’re being cautious. The updated outlook is calling for 25% to 33% YOY growth (adjusted) which assumes a deceleration of business that we don’t see coming. If anything, the business is going to accelerate sequentially in tandem with the summer building season and drive results well above target. This is noteworthy for earnings as well because the company is forecasting significant leverage growth and EPS in the range of up 65% to 73%. 

The analysts are bullish on the stock but none have chimed in since the earnings release. Based on the strength of the release and the outlook for 2021 earnings we are expecting the analyst to begin upgrading the stock and raising their price targets very soon. 

Builders FirstSource Is A Deep Value 

Builders FirstSource is trading at only 17X this year’s earrings and 15X next with significant growth in the forecast. This compares to 25X for Home Depot and 20X for Lowe’s and neither is growing at quite the pace although growth in both is strong. The difference may be the dividend in that BLDR doesn’t pay one while the others do but that may change. The company has a rock-solid balance sheet and ample cash-generating ability so it could pay a dividend if it wanted to. Until then, Builders FirstSource is a growth-oriented company and a deep value compared to the broad market and its peers. 

The technical outlook is bullish but there is a red flag we can’t ignore. The price action has been trending steadily higher for months and surged to a new high today with highly divergent indicators. The divergence is in both the MACD and stochastic and points to weakness in the market or at least softness, that patient investors might exploit. Add to this the potentially very bearish candle that formed with the post-release action and we think this stock could correct at least 3.0% before higher again if not 5% to 10%. In either case, we think the pullback will lead to another buying opportunity.