Builders FirstSource (BLDR) Up 60% in the Past Year: Here's Why
Builders FirstSource, Inc. BLDR is benefiting from exceptionally robust demand for single-family housing and repair & remodeling (“R&R”) activity. Moreover, the company’s merger with BMC Stock Holdings is helping it to deliver cost synergies ahead of its schedule. Shares of Builders FirstSource have gained 60.1%, in the past year compared with the Zacks Building Products – Retail industry’s 18.4% growth.
However, rise in commodity prices, supply-related constraints of key input commodities and stiff competition remain concerns for the company.
Factors Driving Growth
Timely Acquisition and Divestitures
Acquisitions are an important part of Builders FirstSource’s growth strategy to supplement organic growth and expand extensively across vast geographic boundaries. On Jul 1, 2021, Builders FirstSource completed the acquisition of Alliance Lumber. This will likely expand the company’s reach in Arizona and other fastest-growing areas of the country. On Jun 24, Builders FirstSource announced that it intends to acquire WTS Paradigm, LLC. Notably, WTS Paradigm is a software solutions and services provider for the building products industry. This acquisition is an important step toward investing in innovative digital solutions that will help the company provide services to customers more efficiently. On May 3, Builders FirstSource acquired a family-owned leading supplier of lumber and other building materials company — John’s Lumber. The acquisition will improve Builders FirstSource’s product portfolio and expand its reach within Michigan. On Jan 1, 2021, it completed an all-stock merger transaction with BMC. The acquisition of BMC will help it expand its geographical reach in a highly-fragmented industry, enhance value-added offerings and generate higher level of free cash flow to invest in growth. During second-quarter 2021, acquisitions contributed to net sales growth of 3.5%.
Furthermore, the company is strategically divesting its businesses to focus on its long-term plans of pursuing the growth initiatives in its core value-added business operations. The divestment is likely to help release capital and enable the company to invest more in its primary businesses. In July 2021, Builders FirstSource agreed to divest its Eastern U.S. Gypsum Distribution Operations (“Eastern Gypsum Operations”) to L&W Supply (“L&W”). The divestiture, pending regulatory approval and closing conditions, is expected to be completed in the third quarter of 2021.
Boosting Digital Space
Builders FirstSource is focused on investing in innovation and enhancing digital solutions for its customers. The standardization and automation processes along with technology-based workflows will help minimize costs, streamline business operations and enhance working capital efficiency. During second-quarter 2021, the company adopted new logistics technologies, mainly delivery and dispatch management system. The company’s digital strategy includes three major areas, firstly to focus on internal processes and productivity by investing in technology to drive operational efficiency and excellence, next to help streamline interactions with its vendors and customers and lastly to focus on external innovation and investment to offer value-added digital products and services that support customers' success and growth.
Achievement of Cost Synergies
Builders FirstSource closed the merger with BMC Stock Holdings in January 2021. With the help of this merger, the company’s customer outreach across the country increased many folds and is expected to deliver larger economies of scale. During second-quarter 2021, the company garnered $36 million in cost savings. The company’s elevated scale and a very comfortable balance sheet position enable it to project an annual run-rate synergy of $140 million to $160 million by the end 2022, indicating overachievement in just two years compared with the original three-year commitment of between $130 million to $150 million. Also, Builders FirstSource currently expects to deliver $80-$100 million in cost synergies by the end of 2021, up from the previously-projected range of $60-$70 million. The company is focused on cost-saving initiatives and implementing various plans for the same. Owing to this, the company is expected to provide greater resources to invest in growth, innovation and non-stop value creation for all its shareholders.
Strong R&R Demand
Builders FirstSource is witnessing increased in demand for housing amid a long-term shortage of housing supply. During the second quarter of 2021, the company’s core organic sales increased 35.3% on solid demand for single-family housing and R&R activity. Also, low mortgage rates remain tailwinds for the company’s products and services. Housing markets have been showing resilience of late, given low mortgage rates. With the opening of the economy, demand for housing and building material products has been improving on the increasing trend of consumers to invest more in homes amid the pandemic. Revival of housing demand has been a boon for Builders FirstSource and companies like Beacon Roofing Supply, Inc. BECN, Fastenal Company FAST and Lowe's Companies, Inc. LOW in the industry.
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Concerns
Builders FirstSource has been witnessing inflation related to variable cost of input. During the second quarter of 2021, the company witnessed the impact of increased commodity costs on its results. Also, during the second quarter, selling, general and administrative expenses increased 132.7% year over year. This rise was mainly driven by normalization of COVID-19 expense costs and commodity inflation. Notably, the company faced volatility in the lumber market throughout 2020. Being a nationwide supplier of building material, the company is very sensitive to fluctuations in market prices for such commodities.
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