Trimming One Price Target, Reaffirming Another
Let's catch up on some earnings.
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* We are maintaining our price target on Builders FirstSource stock, while others modestly dial back theirs.
* We are trimming our Vulcan Materials price target, but keeping our One rating intact.
Following our actions today that have capped a busy few days, let’s catch up on earnings from Builders FirstSource BLDR and Vulcan Materials VMC.
Builders FirstSource
Following up on our initial comments about June-quarter results from Builders FirstSource, after tuning into the company’s earnings call, we can confirm the company continued to gain ground with its higher-margin value-added product business. Builders continued to act as a consolidator in the building products industry, completing three transactions during the June quarter. These moves grow the company’s reach in northeast Florida, Arizona, and Southern California, and expand its value-added product offering for trusses and high-end windows and doors.
In terms of its revised 2024 outlook, management discussed the shift in consumer preference toward smaller home sizes. That likely reflects affordability issues given the combination of current home prices as well as mortgage rates. However, we have seen mortgage rates move lower, including those for 30-year fixed mortgages, over the last few weeks. While not as low as they once were, those rates are more favorable than those seen earlier this year. Our thinking is that as the Fed embarks on its interest-rate cutting cycle and mortgage rates improve further, we will see the housing market free up and see a pick-up in activity. The same mortgage cuts should also be beneficial for multi-family housing efforts, which has been a modest headwind for Builders in H1 2024.
We’re seeing several downward price target revisions for BLDR, which reflect trimmed EPS expectations for 2024. Because our investment thesis for BLDR factors in the Fed’s rate-cutting cycle, it spans well into 2025. For that reason, we will maintain our current price target of $205. We will continue to keep close tabs on monthly housing data and builder comments for delivery expectations as well as efforts to wring costs out of their operations.
Vulcan Materials
Coming off Vulcan’s June-quarter results and earnings call, the Wall Street response has been to trim back price targets back to $290-$300 from $300-$330. We will join that group, reducing our price target to $300 from $310, a move that ties to Vulcan’s exposure to the single-family housing market, something we discuss above.
Management said that rainy weather disruptions experienced primarily in May also had an impact on its July performance. However, the nonresidential construction part of Vulcan’s business continues to support a vibrant demand outlook, one that should improve in H2 2024 as the company puts these disruptions in the rear-view mirror. That backs our view that these are largely timing-related issues.
Following the selloff in VMC shares over the last week or so, we will maintain our One rating. Potential catalysts that should get the shares working for us again include the eventual upturn in housing construction we discuss above and continued favorable monthly non-residential construction spending figures.
We will remind you of comments we made when we downgraded United Rentals URI shares to a Three rating. As we move deeper into the back half of 2024, the year-over-year comparisons for non-residential construction spending will become more challenging primarily because we will be lapping infrastructure spending programs. The key here for Vulcan will be to drive margins higher to deliver further EPS improvement, and that means we will be closely watching its gross profit per ton figures.
At the time of publication, TheStreet Pro portfolio was long BLDR, VMC and URI.
