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Will Builders FirstSource (BLDR) Earn Profits Amid Inflation?

·6 min read

The Zacks Building Products – Retail industry has been ailing from decades high inflation related to raw materials, transportation expenses and supply-related challenges. The industry is directly linked to the housing market and will face slow demand shortly as homebuilders are experiencing softening housing demand.

Defying these odds, Builders FirstSource, Inc. BLDR is likely to gain in the future on the back of its focus on innovations and digital solutions for customers, cost synergies and strategic acquisitions. BLDR will also likely to benefit from its industry-leading platform, national network, operating model and repair & remodeling activities.

Shares of this manufacturer and supplier of building materials have gained 40.1% over a year versus the industry’s 3.8% growth and the Zacks Retail-Wholesale sector’s 17.3% fall.

The price performance was backed by a solid earnings surprise history, having surpassed the Zacks Consensus Estimate in the trailing 16 quarters. Earnings estimates for 2022 have moved higher to $14.72 per share from $12.30 over the past 30 days, depicting analysts’ optimism over BLDR’s prospects. The company currently has a VGM Score of A, supported by both a Value, Growth and Momentum Score of A.

Zacks Investment Research
Zacks Investment Research

Image Source: Zacks Investment Research

Let’s delve deeper into the factors supporting this Zacks Rank #3 (Hold) company’s growth trajectory. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Robust Q2 Results & Prospect: Builders FirstSource recently reported impressive second-quarter 2022 results, wherein adjusted earnings increased 126.8% and net sales grew 24.2% on a year-over-year basis. Core organic sales grew 12.2% from the prior-year quarter as commodity price inflation contributed 3.9% to net sales. Acquisitions added 8.1% to net sales growth. The upside was led by solid demand for its products amid supply woes. Gross margin and adjusted EBITDA margin expanded 640 and 680 basis points, respectively.

For 2022, the company expects multi-family starts growth in low double-digits and R&R to improve low-to-mid single digits. Earlier, it expected multi-family starts to grow in low-to-mid single digit.

The Zacks consensus mark for 2022 net sales is pegged at $21.88 billion, reflecting 10% year-over-year growth. The same for earnings suggests 42.6% growth from the year-ago figure of $10.32 per share.

Buyout Synergies: Builders FirstSource remains focused on systematic acquisitions to supplement organic growth and expand across vast geographic boundaries. The company’s first selective targets are those entities manufacturing prefabricated components such as factory-built roof and floor trusses, wall panels, stairs, engineered wood and other value-added products such as vinyl windows and millwork. Secondly, Builders FirstSource intends to enter some of the homebuilding markets wherein it does not currently operate. So far in 2022, the company acquired three companies.

On Jul 1, it made a tuck-in acquisition of HomCo Lumber and Hardware. HomCo is a highly-profitable distributor in the attractive Flagstaff, AZ market, with low customer concentration and a diverse product mix. HomCo generated approximately $44 million in sales in 2021.

BLDR expects acquisitions, completed within the last twelve months, to add net sales growth of 6-7% in 2022.

Focus on Innovations & Digital Solutions: Builders FirstSource remains focused on investing in innovations and enhancing digital solutions for customers. 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; to help streamline interactions with vendors and customers; and to focus on external innovation and investment to offer value-added digital products and services that support customers' success and growth.

The company has been deploying Paradigm Estimate, which it continues to roll out across its operations, to provide faster and more accurate customer quotes. Till June 2022, BLDR completed 4,500 take-off estimates on customer plans and the adoption will continue to accelerate. This process also provides a foundation for configurable visualization technology and improved design and construction efficiency for homebuilders. Also, it completed agreements with SnapADU and Creative Homes for the configurable visualization tool, adding nearly 300 annual starts.

Focus on Productivity: Builders FirstSource expects to deliver more than $100 million in productivity savings in 2022 by continuing to leverage its BFS 1-TEAM Operating System. In the long term, the company expects a 3-5% of annual productivity improvement as the company has been working hard to leverage best practices and technology, enabling it to become more efficient and productive in serving customers.

Given the productivity gains, BLDR continues to expect its base business to deliver a 10% CAGR on the top line, a 15% adjusted EBITDA CAGR, and a 50 basis points (bps) per year improvement in adjusted EBITDA margin for a total of 200 bps of improvement by 2025.

The company’s expected base business performance of 2022 is already ahead of these targets. As a result of this performance, the company expects to have $7-$10 billion of capital to deploy through 2025. This includes this year's planned capital investments in innovation and organic growth, along with M&A and share repurchases. The company continued its focus on achieving higher operating leverage on the back of higher sales and robust expense controls by offsetting higher variable costs. Builders FirstSource 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.

Some Better Ranked Stocks in the Retail-Wholesale Sector

Tecnoglass, Inc. TGLS manufactures and sells architectural glass and aluminum products for the residential and commercial construction industries.

TGLS currently sports a Zacks Rank #1. The company surpassed earnings estimates in each of the trailing four quarters, with an average of 24.4%.

Ulta Beauty, Inc. ULTA, with a Zacks Rank #2, has a trailing four-quarter earnings surprise of 49.8%, on average.

The Zacks Consensus Estimate for ULTA’s second-quarter fiscal 2022 earnings per share is pegged at $4.86. The consensus estimate for earnings has risen 0.4% over the past seven days.

Costco Wholesale Corporation COST currently has a Zacks Rank #2. It sells high volumes of foods and general merchandise (including household products and appliances) at discounted prices through membership warehouses.

Costco’s expected earnings growth rate for the current year is 18.2%. The Zacks Consensus Estimate for Costco’s current-year earnings has improved 0.2% over the past 30 days.

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