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Builders FirstSource (NYSE:BLDR) on Thursday was downgraded to Neutral from a prior investment rating of Outperform by analysts at Baird. They said shares of the manufacturer and distributor of building supplies have become expensive in relation to the company’s profits.
“Our prior view was that 2023 would be a year of earnings reset before” a recovery in 2024 or later, David J. Manthey, analyst at Baird, said in a May 4 report, “but with over-earning continuing, 2024 will also see earnings declines, creating challenging optics.”
According to Baird’s analysis, shares in Builders FirstSource (BLDR) historically have traded at a next-12-month enterprise value-to-EBITDA multiple of 5 times to 9 times, with an average of 8 times. At its current price of about $107 a share, Builders FirstSource (BLDR) is trading at the higher edge of its historic multiple.
“Making a significant upside case to the stock would require assigning a peak (or higher) multiple, and/or much higher lumber prices and/or single-family housing starts which are historically highly unpredictable,” according to Baird.
Housing Market Signals
After selling off at the beginning of the pandemic in March 2020, shares of Builders FirstSource (BLDR) rallied as the company’s earnings grew with greater demand for building materials. Many people who were stuck at home during lockdowns began remodeling projects to make their living spaces more comfortable or more suitable for remote work and distance-learning.
Amid more recent disruptions to the housing market, Builders FirstSource (BLDR) has seen declining revenue in the past few quarters.
This week, the company said sales fell 32% from a year earlier to $3.88 billion in Q1, but that was better than the consensus estimate of $3.5 billion among Wall Street analysts.
Net income plunged 38% to $333.8 million, or $2.41 a share, from $639.6 million, or $3.56 a share, a year earlier. EPS adjusted for one-time items of $2.96 beat the consensus estimate of $1.56.
Builders FirstSource (BLDR) estimated net sales of $4 billion to $4.2 billion for Q2.
The shares jumped 13% on Wednesday after the company reported Q1 results. The stock has gained 56% in past 12 months, contrasting with 5.8% decline for the Standard & Poor’s 500 stock index.
Seeking Alpha columnist Michael Wiggins De Oliveira (BLDR) rates Builders FirstSource (BLDR) as a Strong Buy on a possible recovery in the housing market. Conversely, contributor Hong Chew Eu has a Sell rating on Builders FirstSource (BLDR) based on a comparison of asset value and earning power.
