Why We're Buying More Shares of This Housing Play

Coming off of Tuesday's quarterly earnings report, earlier today we added to the Portfolio’s position in Builders FirstSource BLDR, keeping our long-term $235 price target and our One rating.

While the shares are trading off some today, as we see it, the company is making the right moves to grow its scope and scale for when homebuilder demand rebounds, reducing costs now to reap the benefits when those volumes rebound. That’s exactly what a company tied to a cyclical end market should be doing. Factor in the company’s multi-billion buyback program that should limit potential downside (more on that below), we opted to use the favorable risk-to-reward setup in the shares. After today’s move, we still have some additional room to scale up the Portfolio’s position size as the Fed moves monetary policy to a more neutral footing and signs of a pick-up in housing activity emerge.

Builders’ September Quarter

Despite the top-line shortfall for its September quarter and the revised revenue outlook for 2024 to $16.25 billion to $16.55 billion from $16.4 billion to $17.2 billion, shares of Builders FirstSource did something on Tuesday that we haven’t seen in a while — rather than succumb to those revisions, BLDR shares shrugged off those shortcomings and moved higher. The reason is that, once we adjust for recent hurricanes and parse the company’s revised outlook for 2024, we see its adjusted EBITDA margins of 13.84% to 14.2% are nicely ahead of the 13.8% market consensus.

While the revenue outlook has softened, Builders has been hard at work driving cost out of the business through productivity gains and shrinking its footprint by 11 facilities so far this year. Bringing some additional cost leverage is the growing use of Builders' digital platform, which logged $600 million in orders that should drive $100 million in revenue this year. As homebuilders continue to adopt technology in design and order systems, we see Builders' margin benefitting especially if management can achieve the long-term $1 billion in incremental sales target it set.

That should also have some nice pull-through for its value-added products, especially as homebuilders look to preserve their profitability. This builds on Builders already using one of our favorite strategies — grow its dollar content per home. We’ve seen that strategy result in a multiplier effect across other industries when volumes rise, and that should play out here in the housing market for Builders as well. We see that as another reason to remain long-term bullish on BLDR shares.

All this bodes well for higher margins when the housing market rebounds as should the integration of nip-and-tuck acquisitions. During the September quarter, Builders closed six such transactions that bring incremental revenue of about $190 million. These moves include adding trust capacity as well as cabinet products and installation. In short, these complement Builders' product offering and expand its reach for when the housing activity improves. We continue to think this will unfold over the coming quarters as the Fed brings monetary policy back to a more neutral footing.

In the meantime, the shares should have support from the company’s buyback efforts. During the September quarter, Builders bought back $160 million in shares at an average price of $176.73. During the earnings call, management shared that year to date it repurchased $1.7 billion in stock and remains on track to buy back $5.5billion to $8.5 billion of stock between 2024-2026. This strongly suggests to us that the company will use this program to help support the shares and could accelerate the program as the expected turn in the housing market picks up steam.

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At the time of publication, TheStreet Pro Portfolio was long BLDR.