Builders FirstSource Inc (BLDR, Financial) experienced a daily loss of -4.56%, and a 3-month gain of 3.8%, with an Earnings Per Share (EPS) (EPS) of 13.13. However, the question remains: is the stock significantly overvalued? This article will delve into the valuation analysis of Builders FirstSource, providing an in-depth exploration of its intrinsic value. Read on to gain valuable insights.
Company Introduction
Builders FirstSource Inc is a reputable manufacturer and supplier of building materials. The company specializes in the production of a wide range of structural and related building products, including factory-built roof and floor trusses, wall panels, stairs, vinyl windows, custom millwork, trim, and engineered wood. These products are uniquely designed for each home and installed by Builders FirstSource. The company's clientele ranges from large production builders to small custom homebuilders.
As of September 15, 2023, the company's stock price stood at $128.14, significantly higher than the GF Value of $80.85, indicating a potential overvaluation. The company boasts a market cap of $16 billion and sales of $18.50 billion. Here is an income breakdown of Builders FirstSource:
Understanding the GF Value
The GF Value is a proprietary measure of a stock's intrinsic value, derived from a unique method. The GF Value Line on our summary page gives an overview of the fair value at which the stock should ideally be traded. This value is calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow) that the stock has traded at.
- GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
The GF Value Line is considered the fair value at which the stock should be traded. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
Based on GuruFocus' valuation method, Builders FirstSource (BLDR, Financial) shows signs of being significantly overvalued. GF Value estimates the stock's fair value based on historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. With its current price of $128.14 per share, Builders FirstSource's stock shows every sign of being significantly overvalued.
Because Builders FirstSource is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth.
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Financial Strength
Investing in companies with poor financial strength carries a higher risk of permanent loss of capital. Therefore, it is crucial to carefully review the financial strength of a company before deciding whether to buy its stock. A great starting point for understanding the financial strength of a company is looking at the cash-to-debt ratio and interest coverage. Builders FirstSource has a cash-to-debt ratio of 0.02, which is worse than 97.08% of 1607 companies in the Construction industry. GuruFocus ranks the overall financial strength of Builders FirstSource at 6 out of 10, indicating that the financial strength of Builders FirstSource is fair.
This is the debt and cash of Builders FirstSource over the past years:
Profitability and Growth
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Builders FirstSource has been profitable 8 years over the past 10 years. During the past 12 months, the company had revenues of $18.50 billion and Earnings Per Share (EPS) of $13.13. Its operating margin of 13.95% is better than 84.57% of 1614 companies in the Construction industry. Overall, GuruFocus ranks Builders FirstSource's profitability as strong.
Growth is one of the most important factors in the valuation of a company. Long-term stock performance is closely correlated with growth, according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Builders FirstSource is 30.7%, which ranks better than 91.96% of 1555 companies in the Construction industry. The 3-year average EBITDA growth is 83.8%, which ranks better than 96.3% of 1325 companies in the Construction industry.
ROIC vs WACC
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Builders FirstSource's ROIC was 21.56, while its WACC came in at 11.42.
The historical ROIC vs WACC comparison of Builders FirstSource is shown below:
Conclusion
In summary, the stock of Builders FirstSource (BLDR, Financial) shows every sign of being significantly overvalued. The company's financial condition is fair, and its profitability is strong. Its growth ranks better than 96.3% of 1325 companies in the Construction industry. To learn more about Builders FirstSource stock, you can check out its 30-Year Financials here.
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