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Builders FirstSource (BLDR) Dips 18% in 3 Months: Buy or Red Flag?

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Builders FirstSource, Inc. (BLDR - Free Report) shares plummeted 14.8% in the last three months versus the Zacks Building Products - Retail industry’s 2.1% growth. The broader Zacks Retail-Wholesale sector rose 1.5%, and the S&P 500 grew 6.3% in the same time frame.

Zacks Investment Research
Image Source: Zacks Investment Research

Builders FirstSource, the largest supplier of building products in the United States, is currently navigating challenges posed by a sluggish housing market and a decline in consumer spending. The cyclical nature of the housing market significantly impacts BLDR's performance.

The sector's overall performance has been lackluster, largely due to persistent weakness in retail sales. According to the latest U.S. Census Bureau report for June, retail sales decreased 0.1% from May. The Federal Reserve's decision to hold interest rates steady has affected buyers, and elevated mortgage rates and affordability challenges have further dampened consumer confidence.

D.R. Horton, Inc. (DHI - Free Report) , PulteGroup Inc. (PHM - Free Report) and Taylor Morrison Home Corporation (TMHC - Free Report) are among BLDR’s top 10 customers (which accounted for 14.7% of 2023 net sales). Recently, all of them recently reported tepid order growth rates in their latest quarterly results, thereby depicting challenges.

What's Holding BLDR Back?

Housing Downturn & Uncertain Global Markets

A sluggish housing market and reduced consumer spending continue to pose significant challenges. Rising inflation and higher interest rates are straining consumer resilience, leading to a prioritization of essential purchases over discretionary spending.

For the second quarter, the company expects net sales to be down in the low single digits to flat, thanks to expected multifamily headwinds. Importantly, it expects a consistent decline in multifamily throughout the year. Adjusted EBITDA is also expected to be down in the high teens in the second quarter.

Although prospects in single-family (which contributed around 75% of BLDR's 2023 revenues) are working in favor of the company, a sluggish trend surrounding the U.S. housing market and lower repair and remodeling (R&R) activity continue to be significant concerns for BLDR.

Higher Labor Costs & Operating Expenses

Builders FirstSource has been dealing with high costs and expenses related to labor and operations. Its selling, general and administrative (SG&A) expenses — as a percentage of net sales — rose 490 basis points (bps) to 22.4% in 2023 compared with 2022. In the first quarter also, SG&A increased 50 bps due to additional operating expenses from additional locations acquired within the last 12 months and decreased cost leverage on lower net sales.

Builders FirstSource Corporate Presentation
Image Source: Builders FirstSource Corporate Presentation

Adjusted EBITDA margin declined 230 bps and 240 bps in 2023 and first-quarter 2024, respectively, due to the above-mentioned headwinds.

For the second quarter, the company expects adjusted EBITDA to be down in the high teens. For 2024, adjusted EBITDA is expected to be between $2.4 billion and $2.8 billion, down from $2.9 billion reported in 2023. Adjusted EBITDA margin is expected to be in the range of 14-15% compared with 17% in the prior year.

Negative Earnings Growth Rate

Although the Zacks Consensus Estimate for the second quarter and full-year 2024 earnings per share (EPS) have moved upward in the past seven days, the estimated figure indicates an 18.8% and 11.4% decline, respectively, year over year. This depicts analysts are concerned about the current-year growth trajectory. Yet, the consensus mark depicts single-digit earnings growth for 2025.

Zacks Investment Research
Image Source: Zacks Investment Research

What Makes BLDR a Most-Watched Stock Despite Woes?

Innovations & Digital Solutions

The company is actively implementing Paradigm Estimate across its operations to deliver quicker and more precise customer quotes. It is committed to leveraging new digital technologies to enhance efficiency in homebuilding and improve its products and services. As a leader in the digital transformation of the homebuilding industry, the company has made substantial investments to expand its digital platform.

In February, the company introduced its new BFS digital tool designed to streamline the building process, making it faster, more efficient, and more cost-effective. Since its launch, this tool has generated more than $10 million in incremental sales. The company’s digital strategy aims to achieve $200 million in additional digital revenues by the end of 2024, with a goal of reaching a $1 billion growth opportunity by 2026.

Acquisitions & Business Expansion

BLDR continues to expand its portfolio through strategic acquisitions, including the recent purchase of Schoeneman's Building Materials Center. This acquisition diversified BLDR's building materials and product offerings while extending its market reach in South Dakota and Iowa communities.

Additionally, in February, BLDR acquired Quality Door and Millwork, a prominent distributor of millwork doors and windows in Southern Idaho. These acquisitions are expected to contribute 1-1.5% to BLDR’s sales in 2024.

Solid Productivity Gains

Builders FirstSource delivered $175 million in productivity savings in 2023 and $123 million in 2022, exceeding its $100 million target. In the first quarter, it generated $40 million in productivity savings as improvement across a variety of projects and leveraged its BFS One Team Operating System. The company expects to deliver $90-$110 million in productivity savings in 2024.

Given the productivity gains, Builders FirstSource expects its base business to deliver approximately 9% CAGR on the top line, a 12% adjusted EBITDA CAGR and a 30 basis points (bps) per year improvement in adjusted EBITDA margin from 2024 to 2026. Adjusted EPS is likely to improve 17% CAGR in the same period.

BLDR Trading Above 50-Day Moving Average

Meanwhile, technical indicators suggest strong performance for BLDR. The stock is trading above its 50-day moving average, signaling a bullish trend.

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Image Source: Zacks Investment Research

Higher Return on Equity (ROE)

BLDR provides solid investment returns compared with the industry’s average, as reflected by its current trailing 12-month ROE of 38.7%. This indicates the company efficiently uses its shareholders’ funds.

Zacks Investment Research
Image Source: Zacks Investment Research

Valuation Looks Rational

Builders FirstSource’s stock is currently undervalued compared to its industry, as shown in the chart below. This might imply that the market has not yet fully recognized or priced the company's potential growth prospects or earnings potential. Its forward 12-month price-to-earnings ratio of 11.36X, largely below the industry average of 20.56X.

Zacks Investment Research
Image Source: Zacks Investment Research

Final Thoughts

The company’s fundamental looks to be in better positions right now but may fail to perform in future as the sluggish housing industry and bleak short-term outlook for business conditions. According to the most recent report from the Commerce Department in June 2024, consumers' expectations regarding future business conditions, labor market conditions, and income have all worsened. Per the report, 12.5% of consumers expected business conditions to improve, down from 13.7% in May 2024.

Investors should avoid considering BLDR shares currently as the housing and R&R market signals a passive trend. Although we have also seen some positive signs of the company, but caution is warranted for this Zacks Rank #4 (Sell) company due to potential challenges in the uncertain global markets and higher interest rates.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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