Our Take on Mixed Reports by Builders FirstSource, Vulcan Materials
Here’s what we’re focusing on during earnings calls today.
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*Builders FirstSource beats on earnings per share but trims revenue outlook.
*Board authorizes new $1 billion share buyback plan, which should provide some support.
*Vulcan Materials misses on earnings, but we like the improving margins.
*Top line should rebound while margins benefit from volume improvement.
In advance of this morning’s earnings calls from Builders FirstSource BLDR and Vulcan Materials VMC, here are key points from earnings, our views on the performance and what's ahead, and how to approach the stocks.
Builders FirstSource: Beat and Buybacks
Builders FirstSource reported quarterly earnings per share of $3.50, well ahead of the $3.02 consensus. With revenue for the quarter largely in line with the market consensus, some will focus on the year-over-year decline in margins that were offset by the company’s share repurchases that collapsed the outstanding share count year over year. It was that decline in the share count that led to the upside EPS surprise for the most recent quarter.
Another way to look at Builder’s June-ending quarter is compared to the March-ending one. We see revenue up 14.5% sequentially and the adjusted earnings before interest, taxes, depreciation, and amortization margin rising to 15.0% when compared to 13.9% in the March-ending quarter.
Despite that favorable comparison, BLDR shares are trading off this morning, which we attribute to the company reducing its 2024 revenue guidance to $16.4 billion -$17.2 billion from the prior $17.5 billion to $18.5 billion. On the earnings call, we’ll want to understand how much of that is due to single-family related and multi-family construction vs. homebuilder uptake for the company’s higher margin value-added products. Because the midpoint of Builders’s revised guidance points to faster adjusted EBITDA growth in the second half of 2024 compared to the first half than its outlook for modest revenue growth over the same period, our suspicion is management will signal a better outlook for the value-added products business. The positive mix shift associated with that business as homebuilders look to shrink their costs was one of the factors that drew us to BLDR shares as did the company’s arms merchant status across the homebuilding industry.
We would say that the recent move lower in mortgage rates could make Builders’s new top-line outlook for 2024 somewhat conservative. Before we make that call, however, we’ll want to gauge the housing market through the dual lenses of monthly housing data and reported homebuilder earnings over the next few months.
Alongside those results and updated guidance, Builders announced a new repurchase plan of up to $1 billion of the company's outstanding shares of common stock. Year-to-date, the company has repurchased 5.9 million shares of its common stock at an average price of $170.55 per share. Given where the shares are trading this morning, we suspect Builders will be putting that new buyback program to work quickly, shrinking the outstanding share count even further in the second half of the year, when compared to the outstanding share count of 116.5 million exiting the June-ending quarter.
When we added BLDR shares to the portfolio, we did so as a longer-term play on the housing market and the eventual Fed rate-cutting cycle that should lead that market to rebound. That is still our play with BLDR shares, and with the Fed that much closer to embarking on a rate-cutting cycle, our plan with BLDR shares will be to let them settle out as the market adjusts to today’s updated outlook and then look to scoop up shares more BLDR shares for the portfolio. To the extent we can make such a move while improving the average cost basis that currently stands at $144.04, so much the better is our thinking.
Vulcan Materials: Weather Woes, Our Forecast
Turning to aggregates company Vulcan Materials, it came up short relative to market expectations for the quarter, thanks primarily to extreme weather. We warned about this, but the somewhat good news is those weather-related woes are the equivalent of pauses of production, not projects getting canceled, effectively making them a timing issue.
Despite the hit to Vulcan’s top line, what stood out was the improvement in its adjusted EBITDA margin to 29.9% compared to 28.2% in the year-ago quarter. That improvement reflects continued improvement in both gross profit per ton and cash gross profit per ton, both of which climbed more than 11% year over year.
Last night infrastructure consulting firm Aecom ACM reported its America’s backlog stood at a record $17.35 billion, equating to six quarters of revenue based on its America’s revenue of $2.8 billion. That business at Aecom is benefiting from infrastructure project spending, including rail, airport capital improvement, and other programs. That tells us the demand profile for Vulcan’s aggregates remains intact, which should support continued year-over-year pricing gains.
On the earnings call at 11 this morning, we’ll assess Vulcan’s outlook for the second half of 2024 and any early indications for 2025. We’ll look at that in relation to non-residential and residential construction prospects and will be interested in the company’s comments on potential CHIPs Act impact, as well as when it thinks we will see a turn in the housing market.
In response to the quarter's headlines, we are seeing VMC shares trade-off, adding to the declines since peaking near $277.50 several days ago. Not surprising, but we will watch them relative to the 200-day moving average at $242.36. Should they find support at that level, once the shares have digested reactions by Wall Street’s fleet of equity analysts, we may have an opportunity for newer members and the portfolio.
The Portfolio is long BLDR, VMC.
