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  • Builders FirstSource: Long Term Value for Those Willing to Wait 1 comment
    Mar 29, 2011 9:32 PM | about stocks: BLDR

    Builders FirstSource, Inc. (NASDAQ:BLDR)                                            


    Investment Thesis:

    I recommend purchasing shares of Builders FirstSource, Inc (“the company”, Builders” or “BLDR”) as I believe the common equity trades at over a 100% discount to its intrinsic value.  BLDR operates in the professional segment of the U.S. residential new construction building products supply market serving customers such as homebuilders and remodeling contractors.  Products include prefabricated components (floor trusses, roof trusses, wall panels, stairs), windows and doors, lumber and lumber sheet goods, millwork (trim, columns, posts) and other building products and services.  The company has 52 distribution centers and 47 manufacturing facilities (many of which share the same physical location) in the southern and eastern US.

    BLDR is tied to the domestic housing market and accordingly has seen its revenues, earnings, and stock price decline severely over the last few years.  The stock price decline has gone too far given the company’s earnings potential in the future.  I believe there is a margin of safety in this turnaround investment as the disparity between the intrinsic value of the company and that reflected in the stock price is great.  I look at this investment with a 2-3 year time horizon.

    Catalyst: The US Housing Market Recovery will happen at some point. The housing market doesn’t need to go back to the frothy levels of 2005-2006 for BLDR to be a very good investment.  It is not a question of if, but only a question of when this company will turn the corner. It just needs the housing market to start to come back.  I think investors willing to wait will be greatly rewarded. A Scotiabank research report indicates that US housing starts will increase 15% in 2011 versus 2010 and then 29% year-on-year in 2012.  Since BLDR’s revenues move in tandem with housing starts this bodes well for the company.  (Also see the US housing starts graph in the appendix section).

    Secondly, Builders is diversifying its offering into the multifamily and light commercial market.  This space was not hit as hard as the residential market in the downturn.  In fact, deal flow for securitizations on pools of mortgages associated with these type properties is picking up.  In a 3/17/11 Bloomberg article referencing an upcoming Cantor Commercial Real Estate securitization, JP Morgan said that sales of commercial mortgage bonds may rise to $45B this year from a low of $3.4B in 2009.  Although these deals involve selling bonds on existing properties and refinancings, new construction and remodels will follow. Although I look more at the multifamily and light commercial expansion as a built in call option on an increase in stock price, it’s worth noting as this business has the potential to add value for BLDR.

    BLDR is underfollowed and under accessible to some institutional buyers: The current low stock price of BLDR (sub $5 / $10 share, etc) prevents some investors from even thinking about buying. Many investors don’t want to come within a mile of anything housing related either.  Robotti & Co has a $5 price target on BLDR which is not surprising as Robert Robotti seems to have a similar opinion of the stock of BLDR based on his holdings.  However, the other four analysts make the 12 month consensus target price only $3.

    Efficiencies and Pricing Power: will be realized by BLDR when the US domestic housing market begins to come back.  From the beginning of the downturn, the company’s margins have been squeezed by its customers (the Beazer, Pulte homes of the world). When business does come back, I believe that BLDR will find itself in a position to capture some margin expansion through pricing power over its suppliers and also its customers.

    Some Notable Holders: include JLL Partners and Warburg Pincus the private equity sponsors.  Collectively the two own about 50.5% of the company’s common equity and I would be willing to venture a guess that they don’t want to see that investment go to zero.  I think in a liquidity crunch, JLL and Warburg would help the company avoid bankruptcy. Obviously, this would come at a cost and with dilution to the other common holders. However, the potential downside in this worst case scenario is far outweighed by safety net that I believe exists because of these holders.


    Valuation:

    I believe the company’s equity has an intrinsic value today of approximately $6.20 per share (versus today’s price of $3.04)representing over 100% upside over the next 2-3 years.  I arrive at the intrinsic value per share by through a DCF taking the average of the terminal value of the company calculated using a 5.5x EBITDA multiple (what the BLDR says would reflect the acquisition price of its various reporting units in their latest 10K page 38) and a 2% perpetuity growth rate.  I assume a WACC of 15.1% (based on the same reasoning and link as above). 

     Valuation

    I have modeled a scenario where revenues at BLDR only start to approach $1.8B in 2015, roughly 77% of its peak revenues of 2006. A Scotiabank research report from March 1 indicates that US housing starts will increase 15% in 2011 versus 2010 and then 29% year-on-year in 2012.  I model the company’s revenues increasing only 5% in 2011, 20% in 2010, and 25% in 2013.  I model the COGS margin to its historical long term average by 2013.   EBITDA turns positive in 2012 and free cash flow turns positive in 2013.


    Investment Risks / Considerations:

    Liquidity: is a large concern as the company could run out of cash and be forced to go into bankruptcy.  However, the company has been and I believe will continue to do a good job at conserving cash. I believe the company will be able to get its cash burn down to $25mm a year over the next 3 years. That would mean the cash they have on the balance sheet today will be able to carry them through until business picks up.  If I am wrong, and they burn $35mm a year like they did last year (even though much of this was due to closing some sites) they will still be able to operate. 

    Note: The update below announced a few hours ago should serve to mitigate much of this liquidity risk if it proves successful.

    4-4-11 UPDATE**

    Aftermarket Annoucnement by BLDR-
    Press Release:  Builders FirstSource Announces Offering of Senior Secured Notes


    "The Company intends to use the proceeds from the offering to redeem its outstanding Second Priority Senior Secured Floating Rate Notes due 2016 as well as its outstanding Floating Rate Notes due 2012, to repay amounts outstanding under the Company's senior secured revolving credit facility and to pay the related fees and expenses associated with the offering and for working capital and general corporate purposes.

    The Company also announced that concurrently with, and subject to the success of, the notes offering, it is entering into an agreement to amend its senior secured revolving credit facility. The amendment, among other things, extends the maturity of the credit facility to March 31, 2016 and will allow the Company to increase the revolving credit line at any time from $150 million up to $350 million in the aggregate, with the consent of the lenders providing the additional commitments. The amended senior secured revolving credit facility will be secured by a first priority lien on certain current assets and a second priority lien on certain non-current assets of the Company and its domestic subsidiaries."

    Appendix:

    Annual US Housing Starts 12/31/1959 to 12/31/2010 (Source: Bloomberg)

    Bloomberg Housing Historical Averarage Housing Starts



    Disclosure: I am long BLDR.
    Themes: Value, Homebuilders, Housing Stocks: BLDR
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  • Christopher Walters
    , contributor
    Comments (5) | Send Message
     
    Author’s reply » Updating the Scorecard: Today I am locking in some profits on some of my BLDR position as the stock has surpassed my target price of $6.19 from the 4-4-11 article and I have seen my original thesis realized as the stock doubled.

     

    An investor that purchased the shares on 4-4-11 at $3.04 and sold on 1-28-13 at $6.38 realized a 110% return versus a 17% total return for the S&P500.

     

    Note that there will likely be continued upside as the recovery in housing continues and people start to rotate into the arms dealers of the industry (suppliers like BLDR) rather than the home builders themselves.
    28 Jan 2013, 02:23 PM Reply Like
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