BLDR Stock Study (1-19-23)

I recently did a stock study on Builders FirstSource (BLDR) with a closing price of $71.69.

Value Line writes:

     > Builders FirstSource, Inc. manufactures and sells a wide variety of
     > building materials, including lumber, floor & roofing products, windows
     > & doors, insulation, siding, and cement. Its customers are
     > homebuilders, remodelers, and commercial contractors.

This large-sized company has grown sales at 34.2% per year for the last 10 years. EPS has grown 56.8% per year since 2016 [excluding 2012-2015, which ranged from -$0.44/share to +$0.57/share]. Lines are mostly up and parallel except for ’17 EPS, which dipped to $0.34/share. PTPM has trended gradually higher with a 5-year average of 4.9%, which trails peer (stated as JCI, TT, and CARR) and industry averages.

ROE has averaged 26.8% over the last five years, which is similar to peer and industry averages. Debt-to-Capital averages a higher-than-desired 64.9% over the last five years. This is falling, though, and recently (’21) crossed below peer and industry averages. Interest Coverage is a comfortable 19.

I assume long-term annualized sales growth of 4% based on the following:

• CNN Business projects 13.6% YOY growth and a 14.2% per year contraction for ’22 and ’21-’23, respectively (based on 14 analysts).
• YF projects 13.6% YOY growth and 41.2% YOY contraction for ’22 and ’23, respectively (13 analysts).
• Zacks projects 13.3% YOY growth and 28.7% YOY contraction for ’22 and ’23, respectively (7).
• Value Line projects 6.9% annualized growth from ’21-’26.
• Morningstar offers a 2-year ACE of 14.3% annualized contraction.

I assume long-term annualized EPS growth of 3% based on the following:

• CNN Business reports ACE of 69.5% YOY growth and a 24.7% per year contraction for ’22 and ’21-’23, respectively (based on 14 analysts).
• MarketWatch projects annualized contraction of 18.8% and 7.1% for ’21-’23 and ’21-’24, respectively (14 analysts).
• Nasdaq.com projects 62.4% YOY contraction and 32.8% per year contraction for ’23 and ’22-’24, respectively (7, 8, and 5 analysts for ’22, ’23 and ’24).
• YF projects 72.7% growth for ’22, 67% contraction for ’23, and 18.8% annualized growth for the next five years (13).
• Zacks projects 72.9% YOY growth for ’22 and 62.4% YOY contraction for ’23 (7).
• Value Line projects 7.8% annualized growth from ’21-’26 while also projecting 17.5% annualized growth from ’20-’26.*

Across the homebuilding and building materials industries, everyone seems to expect a slowdown for ’23. BLDR earnings aren’t expected to come anywhere close to recovering through ’24. Anything can happen, but after a soft ’23 and ’24, for the 5-year growth rate to be 7.8% or in the high teens (per the two LT estimates available) would require ’25 and ’26 to be explosive. I can’t just assume that being 3-4 years into the future.

I’m using a forecast High P/E of 8. High P/E has ranged from NMF to 64.9 (’17) over the last 10 years. Excluding the latter as an upside outlier, the last four years have averaged 13.3—the lowest of which was 10.2 in ’21.

I’m using a forecast Low P/E of 3. Low P/E has ranged from NMF to 31.1 (’17) over the last 10 years. The last four years have averaged 4.8 with a low of 3.4 in ’20. The current P/E is 4.4.

I’m sticking with default and using a Low Stock Price Forecast of $49. This is near the 52-week low price and 31.6% below the previous close.

All this results in an U/D ratio of 3.5, which makes BLDR a Buy. Total Annualized Return (TAR) is 16.1%.

PAR, which uses projected average (rather than high) P/E, is 7.8%. This is not bad for a large company, but I would like to see better unless I can feel confident in the company’s chances to exceed projected growth rates.

To assess that, I check for a margin of safety (MOS) by comparing with Member Sentiment (MS). Based on 73 studies over the past 90 days, MS indicates averages for projected sales growth, projected EPS growth, High P/E, and Low P/E are 10.6%, 8.4%, 12.6, and 8, respectively. I’m more than 50% lower on three inputs and about 33% lower on High P/E.

In addition to using conservative inputs given scant long-term analyst estimates and current uncertainty, MS implies a healthy MOS in this study. That increases likelihood of realizing TAR.

MS has a lower Low Stock Price Forecast at $44.26, but it’s hard to draw any direct conclusions from this. $44.26 would lower the upper Buy threshold in my study to $71 and make the stock a Hold. This also effectively lowers forecast Low P/E on which I’m already quite low (3) along with my entire forecast P/E range.

Taking everything into consideration, I feel comfortable with a Buy up to $74/share.

* — In and of itself, this demands a wholly separate discussion.