2023-07-14 03:54:49 ET
Summary
- Builders FirstSource, a homebuilding supplier, has seen its stock surge by 114% in 2023.
- The company operates in 42 states and offers services such as process management, product selection, and pre-fabricated services, reducing labor costs and waste for home construction companies.
- The company is actively buying back its stock with a new $1 billion authorization approved by the board in Q1.
Background
We have been vocal proponents at Ironside Research for some time that in a gold rush, it's better to sell pickaxes and shovels than it is to search out a plot of ground to dig in. As such, we regularly stay on the lookout for businesses which have a competitive advantage, service an industry, and are less likely to succumb to regional economic pressures.
With that in mind, today we write about Builders FirstSource, Inc ( BLDR ). As a supplier of large, regional, and custom home builders (to name a few of its customer types), Builders occupies an interesting niche in the marketplace. As demand for housing has surged, the market has rewarded the company's stock in 2023.
Against the broader S&P 500's ( SPY ) total return of 17% in 2023, Builders FirstSource has surged by 114%. In this article we'll explore whether or not the stock can continue to progress in this manner, or whether the bull run has exhausted itself. Let's dive in.
A Competitive Advantage
A dirty little secret in the homebuilding industry is that a lot of work is outsourced, especially among regional builders. Some might think well, of course outsourcing exists in the form of sub-contracting. While this is true, the extent of the overall outsourcing goes much deeper. From home layout design and architecture to process planning and supply chain operations, many homebuilders have opted to run an asset-light business and seek these services elsewhere. This is where Builders steps in.
While the traditional business of supplying homebuilding materials seems straightforward, Builders has taken steps to integrate itself in the supply chains of home builders which according to Builders most recent annual filing , including "process management, product selection, order input, scheduling, framing and installation."
Utilizing Builders also allows home construction companies to save on costs by utilizing the company's pre-fabricated services. These services allow components to be custom-made off site and delivered to the builder ready for installation. This process reduces labor costs, the likelihood of error by individual workers onsite, and waste of building products.
Within these pre-fabricated products is perhaps the company's most interesting product, the Ready-Frame system. Since home framing is generally the most labor intensive portion of a home build and the one which arguably requires the most precision, the Ready-Frame system offers builders a service where entire home framing units are pre-made and shipped to the job site in a single unit, ready for assembly.
The company currently operates at 569 locations in 42 states, so the reach of their operations is truly national in scope. Importantly, the company is not only involved in individual home builds--its scale and breadth of its operations also allows it to participate in the multifamily building market as well, which in Q1 2023 made up 13% of its overall sales (see chart below).
Importantly, Builders is also not fully reliant on new construction for its business.
Company Quarterly Presentation
While 67% of sales in Q1 came from new single family builds, 20% of its sales activity was in the repair and remodel market. This is important because it provides a meaningful buffer for the company in the event of a general slump in new housing builds.
The professional building supply market is quite fragmented, and as such it probably comes as no surprise that Builders is an active acquirer.
The company frequently deploys capital to acquire smaller, regional suppliers which can augment the parent company's business. Of course, this strategy is not without risk--acquisitions can quickly become messy or fail to pan out as well as envisioned, especially when a company acquires multiple smaller operations. Thus far, however, the strategy appears to be working well for Builders.
Shareholder Returns & Valuation
While the company currently pays no dividend, Builders has been quite active in returning capital to shareholders in the form of share buybacks. In the last quarter alone, CFO Peter Jackson stated that the company purchased more than 7.5 million shares.
With no dividend, this is consistent with the company's commitment to return capital to shareholders. Since December 2021 the company has purchased $3.2 billion of its own shares, and on the Q1 conference call management announced that the board had approved a new $1 billion authorization for repurchases.
Valuations, for their part, are not cheap but are not overly stretched, either.
On a forward basis, the company has returned to the levels it visited during pandemic days, with the stock trading at around 16x earnings and 11x EV/EBITDA.
As multiples expand, it's tempting to think that the ship has sailed. We, however, aren't so sure. We are fans of the fact that the company is not completely exposed to a single segment of the housing market (though, admittedly, the lion's share of its business is from single-family), and we think that the company's ability to weather business contractions given its history in the marketplace is good.
The Bottom Line
In the fractured marketplace of professional home building supply, Builders FirstSource stands at the top. While the stock has risen dramatically in 2023, we think that additional authorizations for share repurchases and an upcoming December 2023 investor day could help to buoy the stock in the near term. Risks to our thesis include macro changes in the housing market and over-exposure to large home-building customers. We think, however, the deck is likely stacked to favor Builders FirstSource.
For further details see:
Builders FirstSource: Building Value