This week’s posts are focused on equity research (we will resume macro analysis next week) and are public to all. These notes were compiled by Staff Analyst Tim Chang and are meant to be a brief overview of the comprehensive research done on recently initiated coverage.
Builders FirstSource Inc. (BLDR) is a leading supplier of building products to U.S. homebuilders and a manufacturer of building materials, including factory-built substitutes for traditionally on-site produced materials. As of 2022, the company operates 550 locations across 42 states and generates revenue from four segments: Manufactured products, Windows, doors & millwork, Specialty building products & services, and Lumber & lumber sheet goods. With a significant market share increases (revenues +200% from 2019-2022), BLDR is well-positioned in the sector.
BLDR has capitalized on the consolidation trend in the building products distribution market, focusing on value-added products and services. These offerings, which include trusses, millwork, and windows, cater to the ongoing labor shortages in the building sector and enhance building efficiency and quality. The company’s emphasis on factory-built roof trusses exemplifies this strategic direction.
About 67% of BLDR's sales are from single-family new construction. Despite challenges in the multi-family segment, the single-family sector is expected to see a 6% year-on-year increase in starts in 2024. This projection is bolstered by the resilience of new home demand despite higher mortgage rates, driven by a scarcity of existing homes for sale.
BLDR notably expanded its presence in the market between 2019 and 2022, including the acquisition of BMC, which boosted its market share from 2.5% to 5.9%. During this period, its revenues soared by over 200%, fueled by a mix of higher prices for commodities, enhanced value-added services, organic growth within its core operations, and strategic acquisitions.
At BLDR’s recent analyst day event, the company noted that it can achieve a 9% revenue CAGR between 2024-2026 assuming single-family starts return to 1.0-1.1M. BLDR raised its normalized gross margin target to 30-33% from 29%. BLDR targets an adjusted EBITDA CAGR of 12% through 2026, implying 14-15% margins on the base business and the company expects to have $5.5-8.5B in deployable capital over the period.
From 2022-2023E, BLDR deployed $6.1B including $4.4B in buybacks as the company has bought back ~41% of shares outstanding since 2021 at an average price of $74. Capital allocation priorities remain consistent at: 1) maintaining balance sheet and leverage, 2) investing in organic growth, 3) completing margin accretive tuck-in M&A, 4) returning capital to shareholders through buybacks. Notably, BLDR believes that their stock remains undervalued in the market.
Key risks for BLDR include the cyclical nature of the housing market, with particular emphasis on the multi-family sector's slowing growth and the broader housing market's susceptibility to interest rate fluctuations and economic conditions.
The housing affordability index's recent drop to record low levels, combined with the reduction in the average square footage of new homes, presents potential challenges for BLDR's revenue growth, especially given its significant exposure to new home construction. Additionally, the normalization of lumber prices poses a risk to revenue growth and margins, considering BLDR’s dependence on lumber and lumber sheets sales.
BLDR has historically traded at a discount compared to the industry average, but expectations are for it to trade above its historical valuation, given its higher margins, increasing exposure to value-added products, and a more robust ROIC profile. Overall, we view BLDR to be a quality compounder and serial acquirer in a fragmented industry. While BLDR is trading at a premium relative to history, we find any sustained pullback to be an interesting opportunity.
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