We've been asking ourselves recently if the market has placed a fair valuation on Builders FirstSource. Let's dive into some of the fundamental values of this large-cap Consumer Discretionary company to determine if there might be an opportunity here for value-minded investors.
The Market Is Undervaluing Builders FirstSource:
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 belongs to the Consumer Discretionary sector, which has an average price to earnings (P/E) ratio of 22.96 and an average price to book (P/B) ratio of 4.24. In contrast, Builders FirstSource has a trailing 12 month P/E ratio of 14.0 and a P/B ratio of 4.5.
When we divide Builders FirstSource's P/E ratio by its expected EPS growth rate of the next five years, we obtain its PEG ratio of -1.0. Since it's negative, the company has negative growth expectations, and most investors will probably avoid the stock unless it has an exceptionally low P/E and P/B ratio.
Strong Revenue Growth With no capital expenditures:
| 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | |
|---|---|---|---|---|---|---|
| Revenue (MM) | $7,725 | $7,280 | $8,559 | $19,894 | $22,726 | $17,304 |
| Revenue Growth | n/a | -5.75% | 17.56% | 132.44% | 14.24% | -23.86% |
| Operating Margins | 5% | 5% | 6% | 12% | 17% | 13% |
| Net Margins | 3% | 3% | 4% | 9% | 12% | 9% |
| Net Income (MM) | $205 | $222 | $314 | $1,725 | $2,749 | $1,574 |
| Net Interest Expense (MM) | -$108 | -$110 | -$136 | -$136 | -$198 | -$188 |
| Depreciation & Amort. (MM) | $98 | $100 | $117 | $547 | $497 | $558 |
| Earnings Per Share | $1.76 | $1.9 | $2.66 | $8.48 | $16.82 | $11.95 |
| EPS Growth | n/a | 7.95% | 40.0% | 218.8% | 98.35% | -28.95% |
| Diluted Shares (MM) | 117 | 117 | 118 | 203 | 163 | 126 |
| Free Cash Flow (MM) | $181 | $391 | $148 | $1,516 | $3,259 | $2,155 |
| Capital Expenditures (MM) | $101 | $113 | $112 | $228 | $340 | $512 |
| Current Ratio | 1.88 | 1.59 | 2.07 | 1.86 | 1.9 | 1.76 |
| Total Debt (MM) | $3,091 | $2,555 | $3,194 | $5,904 | $5,956 | $3,395 |
| Net Debt / EBITDA | 6.6 | 5.16 | 4.19 | 2.0 | 1.38 | 1.19 |
Builders FirstSource has exceptional EPS growth and generally positive cash flows. Additionally, the company's financial statements display a decent current ratio and healthy leverage levels. Furthermore, Builders FirstSource has weak operating margins with a positive growth rate.
