One of Wall Street's biggest winners of the day is Builders FirstSource, a home improvement retail company whose shares have climbed 4.5% to a price of $174.34 -- 12.68% below its average analyst target price of $199.66.
The average analyst rating for the stock is buy. BLDR may have outstripped the S&P 500 index by 7.0% so far today, but it has lagged behind the index by 29.3% over the last year, returning -5.5%.
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 17.1, based on its trailing EPS of $10.22. The company has a forward P/E ratio of 14.9 according to its forward EPS of $11.65 -- which is an estimate of what its earnings will look like in the next quarter.
The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the third quarter of 2024, the consumer discretionary sector has an average P/E ratio of 22.6, and the average for the S&P 500 is 29.3.
To gauge the health of Builders FirstSource's underlying business, let's look at gross profit margins, which are the company's revenue minus the cost of goods only. Analyzing gross profit margins gives us a good picture of the company's pure profit potential and pricing power in its market, unclouded by other factors. As such, it can provide insights into the company's competitive advantages -- or lack thereof.
BLDR's gross profit margins have averaged 29.2% over the last four years. While not particularly impressive, this level of margin at least indicates that the basic business model of the company is consistently profitable. These margins have slightly increased over the last four years, with an average growth rate of 6.1%. Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Builders FirstSource's last four annual reports, we are able to obtain the following rundown of its free cash flow:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2023 | 2,306,872 | 476,335 | 1,830,537 | -43.83 |
| 2022 | 3,599,231 | 340,152 | 3,259,079 | 115.03 |
| 2021 | 1,743,549 | 227,891 | 1,515,658 | 924.2 |
| 2020 | 260,067 | 112,082 | 147,985 | -62.17 |
| 2019 | 504,046 | 112,870 | 391,176 | 115.62 |
| 2018 | 282,830 | 101,411 | 181,419 |
- Average free cash flow: $1.22 Billion
- Average free cash flown growth rate: 44.9 %
- Coefficient of variability (the lower the better): 0.0 %
Free cash flow represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With a positive cash flow as of the last fiscal year, BLDR is in a position to do either -- which can encourage more investors to place their capital in the company.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (market value divided by book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.
Builders FirstSource's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 4, so the company's assets may be overvalued compared to the average P/B ratio of the Consumer Discretionary sector, which stands at 3.19 as of the third quarter of 2024.
Builders FirstSource is by most measures undervalued because it has a Very low P/E ratio, an average P/B ratio, and generally positive cash flows with an upwards trend. The stock has strong growth indicators because it has a a PEG ratio of less than 1 and decent operating margins with a positive growth rate. We hope you enjoyed this overview of BLDR's fundamentals.
