Builders FirstSource: Massive Capital Returns, Cheap Stock, Headed Higher (NYSE:BLDR)

Investment Thesis

Builders FirstSource (NYSE:BLDR) has moved higher a lot in the past year. I know this because I’ve been arguing for bullish this stock for more than a year.

However, what the stock was priced at yesterday, last month, or last year, makes no difference when we look forward to next month or next year. All that matters now is whether the company’s intrinsic value is growing or shrinking. Everything else is a distraction.

And I believe that BLDR’s intrinsic value is evidently improving. Here’s why I’m long this stock.

Rapid Recall

In my previous analysis of Builders FirstSource (BLDR) I stated,

[…] I argue, that BLDR is probably even cheaper than this figure [9x forward free cash flow]. What’s more, while I don’t discuss this in this analysis, keep in mind that BLDR is a cannibal. Meaning, a business that is oozing free cash flow and using that free cash flow to repurchase company stock.

My bullish assessment is that this stock is cheap. That the company is buying back significant shares each quarter. And that the outlook for 2024 is likely to be better than 2023, leaving the company well set up to deliver investors with compelling returns.

Outlook Into 2024 Is Attractive

BLDR doesn’t often provide long-term guidance. In fact, it often simply notes what the next quarter will look like. But BLDR now believes that it has enough visibility into the end of the year that it was able to provide investors with guidance for 2023 as a whole.

The high end of its revenue guidance assumes that lumber prices average around $500 bcf, see below.

As you can see above, this estimate is in line with what lumber prices presently trade at.

What this means in practice, is that BLDR’s H2 2023 comparable revenue growth rates with the same period last year should see the company deliver around -10% CAGR compared with what analysts presently expect, which is approximately negative 13% for H2 2023.

This means that BLDR has reported its trough quarterly revenues!

The outlook from this point forward into sequentially all the way into the middle of 2024 will become more attractive. In fact, there’s no need for heroics from BLDR, just muddling through the next quarters at similar lumber volumes would suffice to deliver sequentially accelerating growth rates.

Massive Capital Returns

Beyond its cheap valuation, the reason why I own BLDR is that the company is returning to shareholders substantial sums of capital.

Having bought back 5% of its market cap during Q1 2023, BLDR didn’t stop and bought back a further 5% of its market cap in Q2. Altogether, its year-to-date buybacks have amounted to approximately 11% of its total market cap.

Furthermore, the good news doesn’t stop there because BLDR now believes that it can get its gross margin profile to around 29% or higher, up from the 28% it previously guided towards.

BLDR Stock Valuation– $1.8 billion of Free Cash Flow

BLDR has been arguing that it could get its full year 2023 free cash flow to approximately $1.8 billion at the midpoint of its range since the start of 2023. Even if the market previously had some uncertainty over how realistic this level of free cash flow was, with BLDR already producing over $820 million of free cash flow in H1 2023, this makes it increasingly likely that BLDR will reach this level of guided free cash flow.

Particularly given that the housing market has significantly stabilized, and multi-family homes appear to be pointing towards double-digit growth rates into the back half of 2023.

The Bottom Line

In my previous analysis of BLDR, I highlighted the stock’s attractive valuation and its status as a cannibal, generating ample free cash flow and using it for share repurchases.

Looking ahead to 2024, the outlook for BLDR is promising, with expectations of sequentially accelerating revenue growth rates and the likelihood of better performance than in 2023.

The company’s massive capital returns to shareholders through substantial buybacks, amounting to approximately 11% of its total market cap year-to-date, further add to its appeal.

BLDR’s projected free cash flow of around $1.8 billion at the midpoint for 2023 seems increasingly achievable, especially with a stabilized housing market and positive growth trends in multi-family homes in the latter half of the year.

These factors collectively make BLDR an attractive investment opportunity with the potential for compelling returns.