Builders FirstSource Is Likely a Long-Term Winner

Builders FirstSource (BLDR) manufactures and supplies building materials, manufactured components, and provides other services to homebuilders, contractors, remodelers, and consumers throughout the United States.

In recent years, the company has strategically transformed itself into much more than a lumber supplier. This has been done through organic growth and several mergers and acquisitions.

I am bullish on BLDR stock. (See Analysts’ Top Stocks on TipRanks)

Stock Price and Valuation

Builders FirstSource stock has been on a tear in 2021. The stock is up almost 100% year-to-date. Still, the stock remains fundamentally undervalued. Due to a number of accretive acquisitions, and the strong state of the housing market, the stock trades at a price-to-earnings (P/E) ratio of just over 10. This falls to just 8.7 on a forward basis. In a market full of high-flying growth stocks with little GAAP profits, this is a welcome sight.

The company has also authorized an additional $1 billion in share buybacks. This amounts to about 6.4% of its current market cap. Share buybacks also allow management to support the share price during potential downturns by providing a baseline level of demand. This authorization follows a previous $1 billion buyback plan that has been mostly spent, signaling that buybacks will likely continue.

Revenues and Profits are Rising

Builders FirstSource’s revenue is dependent upon the price of lumber. For this reason, it is helpful to begin to examine the income statement from gross profit. In this way, we can see what is adding to the bottom line. In Q3 gross profit reached another record high of $1.7 billion. This comes off the previous record of $1.6 billion in Q2. The gross profit margin also rose from 28% to 31% over the same period.

Operating profits are setting records as well, thanks to recent accretive acquisitions. In Q3, the company posted $844 million in operating income on an impressive 15% margin. This exceeded Q2, where $680 million was posted with a 12% margin.

Cash flow was also very healthy, and the EBITDA margin rose to 17.9% from 14.5% over the same period. Management’s pattern of smart and targeted acquisitions is taking shape and has been immediately beneficial to margins.

Wall Street’s Take

Over on Wall Street, Builders FirstSource boasts a Strong Buy consensus rating, based on 12 Buys and no Holds or Sells.

The average Builders FirstSource price target of $95.91 implies 18.7% upside potential.

Making the Right Moves

In recent periods Builders FirstSource has made several high-profile acquisitions. These have been immediately accretive to margins and profits, as promised. The housing market has entered a secular uptrend as sources estimate that the U.S. is short millions of single-family homes. This should fuel demand for building products and services for years to come.

Builder FirstSource’s prefabricated products are also gaining traction. These products provide the company with high-margin revenue streams and foster customer loyalty. The company has also extended the share repurchase program with another $1 billion authorization.

Even better, the stock still trades at a forward P/E of less than 10. Builders FirstSource stock is poised to be a long-term winner.

Disclosure: At the time of publication, Bradley Guichard had a position in securities mentioned in this article.