BUILDERS FIRSTSOURCE BLDR
May 15, 2018 - 1:07pm EST by
eventdrivenequity
2018 2019
Price: 18.25 EPS 2.01 2.46
Shares Out. (in M): 117 P/E 9.1x 7.4x
Market Cap (in $M): 2,130 P/FCF 9.7x 10.6x
Net Debt (in $M): 1,931 EBIT 404 465
TEV ($): 4,061 TEV/EBIT 10.1x 8.7x

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  • Housing
  • Public LBO
 

Description

Thesis summary

  • De-risked public-co LBO-like opportunity, nearing end of merger integration following a transformative acquisition in 2015 (ProBuild), with leverage to single-family housing (SFH) cycle and a key beneficiary from now pervasive building product inflation

  • BLDR is the #3 Lumber & BMAT distributor in the U.S. behind ABC/L&W and BECN/Allied, with broad geographic reach (400 locations in 75 of top 100 MSAs) and balanced end-market exposure (72% sales to new SF Housing / 22% R&R / 6% MF housing)

  • Positive outlook for SF Housing and R&R spend (combined > 90% of BLDR sales exposure) should drive +MSD revenue growth next few years and provide incremental margin upside; end market guidance on 2018 for SF Housing +MSD-HSD%, R&R +3%, with 5-6% product inflation  

  • Risk of rising mortgage rates to new starts trajectory is overblown (current 4.6% 30-yr mortgage rate likely on track towards 5% by 2020, is still below 5.8% historical avg), builders have flexibility in size and options to maintain affordability (which is still far better than historical averages), and own vs. rent economics are still highly-favorable across nearly every MSA

  • In addition to the housing growth drivers, BLDR benefitting from a mix-driven margin tailwind as homebuilders migrate from traditional building materials (sheet lumber) to pre-fabricated products (roofing trusses, flooring) in construction, which yields material labor savings.  Pre-fab carries a 1000 bps GM% premium over lumber sheet goods and 60% of homes in the U.S. currently built w/o any pre-fab components.

  • BLDR’s pre-fab offering (a unique competitive differentiator) adds resilience to the business model, allowing the company to remain agnostic towards the ultimate mix of SFH housing demand (entry-level vs move-up vs luxury).  While move-up and luxury homes carry revenue per unit for BLDR, entry-level homes are the most-likely to use pre-fab components (b/c labor savings are more material to overall cost), yielding similar EBITDA per unit contributions.  In general pre-fab is an example of a benefit of BLDR's scale in a fragmented market and we expect it to be a key driver of share gain going forward.

  • Deleveraging story in “public LBO” with Q118 ND/EBITDA at 4.5x on pace to fall by 1.0x per year supported by EBITDA growth and high FCF conversion on low cap-intensity (capex 1.6% sales) + solid WC mgmt + NOL tax shield in 2018.  Multiple capital-structure transactions reduced run-rate cash interest expense by over $30m + material cash-tax benefits from tax reform (BLDR is 100% US taxpayer) provide further support to mgmt guidance of $170-190m FCF for 2018, a 10% FCF yield

  • New capital allocation option likely emerges within the next 12 months as BLDR approaches 2.5x-3.0x leverage target, with another potential med/large deal and a repeat of the prior successful M&A integration playbook;  several mid-sized competitors (5 with $2-3B annual sales, 6 others with $500m–$1.5B in sales) and over 100 smaller comps (avg $100m of revenues) make potential targets

  • Highly-favorable near-term valuation and risk/reward setup, with stock trading at 7.6x / 6.7x our base case 2018 / 2019 EBITDA ests of $505m / $573m and over a 10% FCF yield;  at 8.0-8.5x 2019 EBITDA on a pro-forma B/S (still conservative versus historical building product and distributor multiples), stock is worth high-$20’s to low-$30s, for 50-60% upside

  • If BLDR continues toward its long-term growth targets of doubling 2016 EBITDA and tripling FCF generation by 2021, we think the stock would be worth $50 (over 100% upside)

 

Housing cycle

  • We believe that the historically cyclical housing market is in the middle of a secular upswing.  We see a multi-year runway ahead supporting +MSD SF housing demand growth as HH demographics + labor tailwinds + improving consumer balance sheets + historic lows in existing home inventory drive new home construction

  • HH formation demos are hugely-favorable as prime home-buying 30-35 yr age group increases sharply over the next 10 years and the 20-29 yr age group peaks, providing an echo boom supporting incremental demand; barring a material recession, we think there could be a potential super-cycle for single family housing in the next 5 years

 

  • Labor market strong and getting stronger, with labor participation rate still at late 1970’s levels, the employment / population ratio improving (but still at early 80’s levels) and wage growth is happening