Seeing Builders FirstSource's Fundamental Value Through The Noise

Summary

• Market narratives often persist in the face of contradicting data (for instance, the "Retail Apocalypse").
• Doing your diligence helps maintain the objectivity needed to see when a narrative is wrong and if there is value in a particular sector or stock.
• This firm has been steadily growing profits, is more efficient than its peers, and should benefit from a structural shift in the way it customers do business.

Market narratives often persist in the face of contradicting data (for instance, the "Retail Apocalypse"). Doing your diligence helps maintain the objectivity needed to see when a narrative is wrong and if there is value in a particular sector or stock.

This firm has been steadily growing profits, is more efficient than its peers, and should benefit from a structural shift in the way it customers do business. However, overblown fears of a housing crash have the stock priced as if profits will be nearly cut in half. Builders FirstSource (NYSE:BLDR) is this week's Long Idea.

Long-Term Track Record of Profit Growth

Investors who focus solely on headlines may be surprised to learn that BLDR has consistently grown profits, both in the years after the housing crash and recently. Since 2015, BLDR has grown after-tax operating profit (NOPAT) by 35% compounded annually. Trailing twelve month NOPAT of $310 million is up 26% year-over-year. Long-term, BLDR has grown NOPAT by 32% compounded annually since 2007.

Figure 1: BLDR's Revenue & NOPAT Since 2008

Leveraging Leading Market Share and A More Efficient Business

BLDR has managed to achieve a level of scale and market share that is rare in the highly fragmented professional building materials industry. Through its strategic acquisition of ProBuild in 2015, which more than doubled the firm's revenue, Builders FirstSource became the largest supplier of structural building products for new residential construction and repair and remodeling in the United States.

In the 2018 ProSales 100, which ranks all professional building suppliers, regardless of product type, by sales, BLDR ranked second, with a 13% market share. The top firm is ABC Supply, a roofing and siding manufacturer, and not a competitor of BLDR. Its closest competitors, BMC Stock Holdings and 84 Lumber each earned a 6% share of the overall professional building suppliers market.

Analyst’s Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.