Are Builders FirstSource Shares Fairly Valued with a -3.2% Decline?

Standing out among the Street's worst performers today is Builders FirstSource, a home improvement retail company whose shares slumped -3.2% to a price of $131.91, 23.66% below its average analyst target price of $172.8.

The average analyst rating for the stock is buy. BLDR underperformed the S&P 500 index by -3.0% during today's afternoon session, but outpaced it by 124.0% over the last year with a return of 139.0%.

Builders FirstSource, Inc., together with its subsidiaries, manufactures and supplies building materials, manufactured components, and construction services to professional homebuilders, sub-contractors, remodelers, and consumers in the United States. The company is a consumer cyclical company, whose sales and revenues correlate with periods of economic expansion and contraction. The reason behind this is that when the economy is growing, the average consumer has more money to spend on the discretionary (non necessary) products that cyclical consumer companies tend to offer. Consumer cyclical stocks may offer more growth potential than non-cyclical or defensive stocks, but at the expense of higher volatility.

Builders FirstSource's trailing 12 month P/E ratio is 10.5, based on its trailing EPS of $12.58. The company has a forward P/E ratio of 11.0 according to its forward EPS of $11.98 -- which is an estimate of what its earnings will look like in the next quarter. As of the first quarter of 2023, the average Price to Earnings (P/E) ratio for US consumer discretionary companies is 22.33, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.

One limitation P/E ratios is that they don't tell us to what extent future growth expectations are priced into Builders FirstSource market valuation. For example, a company with a low P/E ratio may not actually be a good value if it has little growth potential. On the other hand, it's possible for companies with high P/E ratios to be fairly valued in terms of their growth expectations.

Dividing Builders FirstSource's P/E ratio by its projected 5 year earnings growth rate gives us its Price to Earnings Growth (PEG) ratio of -1.08. Since it's negative, either the company's current P/E ratio or its growth rate is negative -- neither of which is a good sign.

An analysis of the company's gross profit margins can help us understand its long term profitability and market position. Gross profits are the company's revenue minus the cost of goods only, and unlike earnings, don't take into account taxes and overhead. Here's an overview of Builders FirstSource's gross profit margin trends:

Date Reported Revenue ($ k) Cost of Revenue ($ k) Gross Margins (%) YoY Growth (%)
2023-02-28 22,726,418 -14,982,039 34 21.43
2022-03-01 19,893,856 -14,042,900 28 7.69
2021-02-26 8,558,874 -6,336,290 26 -3.7
2020-02-21 7,280,431 -5,303,602 27 8.0
2019-03-01 7,724,771 -5,801,831 25 0.0
2018-03-01 7,034,209 -5,306,818 25
  • Average gross margin: 27.5 %
  • Average gross margin growth rate: 0.0 %
  • Coefficient of variability (lower numbers indicating more stability): 12.3 %

We can see from the above that Builders FirstSource business is not strong and its stock is likely not suitable for conservative investors.

When we subtract capital expenditures from operating cash flows, we are left with the company's free cash flow, which for Builders FirstSource was $3.93 Billion as of its last annual report. Free cash flow represents the amount of money available for reinvestment in the business or for payments to equity investors in the form of a dividend. In BLDR's case the cash flow outlook is weak. It's average cash flow over the last 4 years has been $1.25 Billion and they've been growing at an average rate of 0.0%.

Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts). Builders firstsource's P/B ratio is 3.8 -- in other words, the market value of the company exceeds its book value by a factor of more than 3, so the company's assets may be overvalued compared to the average P/B ratio of the Consumer Discretionary sector, which stands at 3.12 as of the first quarter of 2023.

Builders FirstSource is likely fairly valued at today's prices because it has a very low P/E ratio, an elevated P/B ratio, and irregular cash flows with a flat trend. The stock has strong growth indicators because of its weak operating margins with a positive growth rate, and a PEG ratio of less than 1. We hope this preliminary analysis will encourage you to do your own research into BLDR's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.