Based on the factors that Benjamin Graham considered in analyzing potential stock picks, Builders FirstSource is not a quality investment. Only investors with a high risk tolerance and a solid investment thesis on the stock will be interested in this large-cap Home Improvement Retail company.
Builders FirstSource Is Probably Overvalued
Graham devised the below equation to give investors a quick way of determining whether a stock is trading at a fair multiple of its earnings and its assets:
√(22.5 * 6 year average earnings per share (5.31) * 6 year average book value per share (34.728) = $107.18
After an impressive 104.0% performance over the 12 months, Builders FirstSource is now trading well over its fair value because its Graham number is 10.2% above today's share price of $118.12. Even though the stock does not trade at an attractive multiple, it might still meet some of the other criteria for quality stocks that Graham listed in Chapter 14 of The Intelligent Investor.
Impressive Growth, but Inconsistent Profitability and no Dividend
Builders FirstSource’s average sales revenue over the last 6 years has been $14.37 Billion, so by Graham’s standards the company is large enough to warrant an investment. When published in 1972, Graham’s threshold was $100 million in average sales, which would be the equivalent of around a half million dollars today. Needless to say, this is the least important of Graham's requirements, and may be overlooked by all but the most conservative investors.
More importantly, Ben Graham believed that a margin of safety could be obtained by investing in companies with consistently positive retained earnings. Builders FirstSource had negative retained earnings in 2014, 2015, and 2016 with an average of $-10403461.538461538 over this period. So the company is not accumulating enough cash over time by Graham's standards.
Graham also required a 30% or more cumulative growth rate of the company's earnings per share over the last ten years.To determine Builders FirstSource's EPS growth over time, we will average out its EPS for 2012, 2013, and 2014, which were $-0.60, $0.05, and $0.02 respectively. This gives us an average of $-0.18 for the period of 2012 to 2014. Next, we compare this value with the average EPS reported in 2020, 2021, and 2022, which were $2.66, $8.48, and $16.82, for an average of $9.32. Now we see that Builders FirstSource's EPS growth was 5277.78% during this period, which satisfies Ben Graham's requirement.
We have no record of Builders FirstSource offering a regular dividend.
Negative Current Asset to Liabilities Balance and a Decent Current Ratio
Graham sought companies with extremely low debt levels compared to their assets. For one, he expected their current ratio to be over 2 and their long term debt to net current asset ratio to be near, or ideally under, under 1. Builders FirstSource fails on both counts with a current ratio of 1.9 and a debt to net current asset ratio of -1.4.
According to Graham's analysis, Builders FirstSource is likely a company of low quality, which is trading far above its fair price.
| 2018-03-01 | 2019-03-01 | 2020-02-21 | 2021-02-26 | 2022-03-01 | 2023-02-28 | |
|---|---|---|---|---|---|---|
| Revenue (MM) | $7,034 | $7,725 | $7,280 | $8,559 | $19,894 | $22,726 |
| Gross Margins | 25.0% | 25.0% | 27.0% | 26.0% | 28.0% | 34.0% |
| Operating Margins | 4% | 5% | 5% | 6% | 12% | 17% |
| Net Margins | 1.0% | 3.0% | 3.0% | 4.0% | 9.0% | 12.0% |
| Net Income (MM) | $39 | $205 | $222 | $314 | $1,725 | $2,749 |
| Net Interest Expense (MM) | -$193 | -$108 | -$110 | -$136 | -$136 | -$198 |
| Depreciation & Amort. (MM) | -$93 | -$98 | -$100 | -$117 | -$547 | -$497 |
| Earnings Per Share | $0.34 | $1.76 | $1.9 | $2.66 | $8.39 | $16.82 |
| EPS Growth | n/a | 417.65% | 7.95% | 40.0% | 215.41% | 100.48% |
| Diluted Shares (MM) | 116 | 117 | 117 | 118 | 206 | 163 |
| Free Cash Flow (MM) | $238 | $379 | $610 | $364 | $1,958 | $3,929 |
| Capital Expenditures (MM) | -$59 | -$97 | -$106 | -$104 | -$214 | -$329 |
| Net Current Assets (MM) | -$1,234 | -$962 | -$1,118 | -$797 | -$1,944 | -$2,135 |
| Long Term Debt (MM) | $1,772 | $1,546 | $1,277 | $1,597 | $2,926 | $2,978 |
| Net Debt / EBITDA | 4.57 | 3.32 | 2.59 | 1.82 | 0.98 | 0.68 |
