Builders FirstSource, Inc (BLDR -2.09%) supplies builders, contractors, remodelers, and others with lumber, building materials, and manufactured components throughout the United States. The company went public via IPO back in 2005, and the recent merger with BMC in 2020 has significantly transformed the corporation. BMC, like Builders FirstSource, is a construction and building supply company operating principally in the Western and Southern United States. The merger created a company with expanded geographic reach and efficiencies of scale.
Source: Getty Images.
Macro secular trends are highly favorable
Builders FirstSource has set itself up to capitalize on secular trends in housing that should last for years. After the housing market crashed in 2008, the United States significantly underbuilt for many years, as shown below.
United States Housing Starts
Because of this, the country is now short millions of homes. The only question seems to be, how many million? Currently, it is believed to be more than 5 million. This gap between supply and demand will take many years to close, and Builders FirstSource has positioned itself to capitalize. The housing market will likely experience short-term price fluctuations, however Builders FirstSource products will remain in demand for the long run.
The labor market in the United States is extremely tight right now. Contractors and builders are struggling to find enough willing and competent workers. Builders FirstSource provides prefabricated products that directly benefit from this type of market. The prefabricated products reduce the labor needed at jobsites substantially and, once a user tries them, they are very likely to use them again according to CEO Dave Flitman. Best of all, these products are much higher margin for Builders FirstSource than non-fabricated products.
This company is expanding in all the right areas
After the BMC merger, the company has been strategically acquiring local lumber yards, manufactured material companies, and other synergistic enterprises to help bolster their foothold in the industry. These acquisitions are generally accretive which increases margins and the ability to serve customers. Smartly, Builders FirstSource has focused on the fastest growing areas of the country and is presently servicing the vast majority of major markets in the United States.
For example, the company recently acquired Cornerstone Building Alliance located in Maricopa County, AZ. This hub, which serves Phoenix, Tucson, and Prescott Valley, is located in the fastest growing county in the country. Next, in September 2021 the company announced the acquisition of California TrusFrame which is the biggest producer of value-added products in the state of California. Finally, Builders FirstSource added WTS Paradigm to give the company a new digital dimension. The digital strategy involves being a part of the building process from design, through bidding and planning, and, of course, supplying the material to build the final product. Paradigm's technology platform will help Builders FirstSource become the comprehensive solution they aspire to be.
The results are positive across the board
All of these actions have led to increasingly positive results for the company. It is helpful to discuss the results beginning with gross profit, rather than strictly revenue, because of the fluctuation in lumber prices. Builders FirstSource has achieved increasing gross profit and operating income quarterly since March of 2020. Quarterly operating income has risen from just $61 million to over $843 million during this period. Even better, in no small part due to accretive acquisitions, operating margin is the highest in recent history, as shown below.
Source: Builders FirstSource
Along with the metrics above, the company is producing generous cash flows which will allow the company to potentially repurchase $1 billion in shares through a newly authorized buyback program. If all $1 billion is used, it would amount to approximately 7.5% of the current market cap.
The stock currently trades at a price to earnings ratio (PE) of just 8 on a forward basis. This is despite a one year share price return of over 90% and shows that the stock has plenty of room for more gains.
The Verdict
Builders FirstSource has made seemingly all the right moves lately. Management is transforming the company from a lumber supplier to partner in all phases of the building process. The stock has made impressive gains for shareholders while the fundamentals have easily kept pace. The improving metrics, intelligent acquisitions, and buyback program make this a bargain in a market where bargains are tough to come by.
