Builders FirstSource (BLDR) manufactures and supplies building materials, manufactured components, and construction services to professional homebuilders, sub-contractors, remodelers, and consumers in the United States through its subsidiaries.
While many think of it as a simple lumber supplier, it has transformed into much more than that through organic growth, and mergers and acquisitions.
It has thus become an indispensable partner to builders, and is benefiting tremendously from the country's housing needs. (See BLDR stock charts on TipRanks)
I am bullish on BLDR stock.
Housing Shortage
When the housing market crashed in 2008, it sent the country into a long and deep recession known as the Great Recession. There were far fewer home buyers as unemployment soared and lingered.
Further, the predatory lending of the prior few years had left many with poor credit, debt, and homes they could no longer afford. Foreclosures were commonplace.
Many younger people also moved back in with their parents. Demand for new homes was almost nonexistent, relatively speaking. Predictably, new home builds (known as "housing starts") plummeted.
Housing starts dropped well below any period on record since the 1960s, surpassing even the lowest prior levels. There they stayed for several years.
Meanwhile, the United States total population has grown over 85% since 1960. Housing starts finally approached prior averages nearly 10 years after the Great Recession began in 2008.
With the economy again strong and incomes up, there is tremendous demand for housing. Millennials are in their prime family and earning years, city dwellers are moving to the suburbs, and Generation Z is joining the fray. The National Association of Realtors Estimates that the country is short 6.8 million housing units.
Perfect Timing
In 2020, BLDR merged with BMC Stock Holdings (NASDAQ:BMCH) to form a building materials and services giant with exposure to the fastest growing markets in the U.S.
The merger also consolidated many expenses, and was highly accretive to margins. The company has used further M&A activity with the acquisition of Cornerstone Building, the largest supplier of building materials in Arizona. This gives the company tremendous access to the fastest growing county in the entire country: Maricopa County. It is expected to be immediately accretive to earnings.
Another consideration during this time of growth is the extremely tight labor market. Employers are struggling to find reliable employees, and this is true for builders. Builders FirstSource provides prefabricated materials to contractors. This eliminates jobsite waste, alleviates labor shortage pains, and once contractors try the products they are likely to continue purchasing them.
These "value-added" materials are high-margin for Builders FirstSource, and separate it from a traditional lumber yard. Of its $5.6 million in Q2 2021 revenue, more than half was from products and services other than lumber.
The company truly wants to be involved in the building process from start to finish. To this end, the company has also purchased WTS Paradigm.
Paradigm provides software to builders for design, drafting, enterprise resource planning, sales, and other functions. Taken together, BLDR has become an invaluable member of the building community, while demand is at its highest point.
BLDR Revenue and Earnings Growth
The accretive M&A activity and organic growth have had a tremendous positive impact across the board. As gross revenue is dependent upon lumber costs which are passed on to customers, it is helpful to start the analysis at gross profit and work down.
For the six months ended June 30, 2021, BLDR earned $2.7 billion in gross profits, a 169.9% year-over-year increase. Net income for Q2 2021 was $497 million. For the six months ended June 30, 2021, net income was 669.8 million.
This has translated well to the bottom line. Earnings per diluted share were up 250% to $2.39 in Q2 2021, compared to $0.67 in Q2 2020.
This comes despite a significant increase in share count due to the merger. BLDR trades at a very reasonable 10.2 price-to-earnings ratio (P/E), and a discounted 10.7 forward P/E.
Wall Street's Take
Wall Street analysts are extremely bullish on BLDR stock, with a Strong Buy consensus rating, based on 11 Buys, and one Sell. The average BLDR price target of $67.45 implies 23.9% upside potential.
Summary on Builders FirstSource
BLDR stock is the right company at the right time to capitalize on a significant housing shortage.
Underbuilding has left the U.S. several million homes short, and construction tailwinds should last for several years.
Builders FirstSource is more than just a lumber yard, and its results are evidence of its indispensability to contractors.
Disclosure: At the time of publication, Bradley Guichard had a position in BLDR.
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