Builders FirstSource Hit An All Time High, Will It Hold?

Key Points

• Builders FirstSource reported its first quarter 2023 earnings results this week, sending the stock to all-time highs despite some warnings from management.
• Investors will find record-level profitability and EPS stemming from these strategic management decisions. 
• Shareholders share the bounty as several million shares are taken off the market; investors wondering if they missed the rally can still shop the stock for single-digit P/E ratios.

Typically after a company releases earnings, investors react by weighing two pieces of important information. Firstly, the actual earnings results and other critical financial metrics about the underlying business can be a placeholder to digest what occurred through the period. Secondly, and perhaps most importantly, investors place a lot of weight and sentiment on management guidance and expectations for the future, as these outlooks directly impact valuations and other factors.

Builders FirstSource NYSE: BLDR reported its first quarter of 2023 earlier this week. The stock rallied to its highest valuation despite the broader market declining on the back of the FED hiking interest rates once more. The company did not only report slowing sales and declining margins across the board, but management also put out guidance that would imply further declines for 2023. Why is it, then, that the stock keeps on rising despite these direct warning shots?

Perspective is a Virtue

Builders FirstSource reported a 33.7% revenue decline over the twelve months, attributed to lower single-family home starts and commodity price deflation. United States housing starts figures have suffered a downtrend toward volumes not seen since 2019. In addition, commodities like lumber, concrete, and steel have also given up gains seen in the 2020-2022 period of spiking inflation and unexpected demand from various industries.

To put these trends into perspective, Builders FirstSource financials show the company earned $20.7 billion in the past twelve months, starting with revenue. While this figure is lower than 2022 revenue figures of $22.7 billion, it is still magnitudes larger than 2020 revenue of $8.5 billion.

Moreover, despite 2020 being a year of shutdowns across major economies, where construction and housing took a back seat in the U.S., the last twelve months' revenues are still tremendous compared to pre-pandemic levels of $7.2 billion in 2019.

Some will dismiss these achievements by pointing to revenue growth from acquisitions, which according to management presentations, brought an additional excess of $170 million in 2022. However, builders FirstSource sports a disciplined mergers and acquisitions approach, as they successfully acquire bolt-on operative businesses that do not inflate the company's balance sheet with debt.

Before realizing three acquisitions in 2022, Builders FirstSource carried 44.3% debt as its total capitalization. Debt only increased to 47.1% after the acquisitions were closed.

Management Saves the Day

BLDR stock traded at a higher 24x price-to-earnings multiple in 2021. The company faced the beginning of nightmare supply chain constrictions and inflation pressures. Today, the stock trades at a 6.7x price-to-earnings multiple due to its 93% increase in earnings per share from $8.48 in 2021 to $16.82 in 2022.

While most, if not all, of these earnings, came from the bolt-on acquisitions made, existing shareholders got to enjoy a larger piece of a more profitable pie. Management repurchased 7.5 million shares from the open market for $83.17, or an actual 5.0x price-to-earnings multiple. 

Understanding that Builders FirstSource operated over its capacity would help investors understand why management focused - and may continue to focus - on acquisitions. In 2019 the company was fast approaching 100% capacity utilization with normalized markets; 2021-2022 made executives realize there was too much demand and too little time to react.

Despite pointing to no apparent acquisition-led revenue growth in 2023, investors are beginning to realize just how undervalued the stock may be.

With a 10-20% decline in single-family housing starts in 2023, management expects total sales to fall between $15.5 billion and $17.5 billion, translating into a 16-25% decline. These assumptions should have been enough to send the stock into a decent pullback if it was not for the added earnings and subsequent cheap multiples seen today.

Assuming no acquisitions adding to additional sales may be a conservative, nonetheless safe, scenario. However, considering the elevated capacity utilization rate in the company, investors should not be surprised if further acquisition announcements are made.

Builders FirstSource analyst ratings suggest the stock may be at fair value. However, investors could be well served by weighing the top-side price estimates of $150 per share. Top-side price targets seem more appropriate, considering the stock historically traded between 15-20x price-to-earnings multiples when it sells at a fraction of that today.

Given the all-time highs, the Builders FirstSource chart will show a rally with no resistance in sight. However, cautious investors could wait for a pullback to the nearest support at $92-$95 per share. Then, the tough decision-making will come through weighing buying the stock at a single-digit P/E ratio or praying for a better price at support.