Follow Builders FirstSource to never miss an important update.
New home construction is slowing as builders face a double hit from expensive materials and a shortage of skilled workers. This matters for Builders FirstSource because it sells the lumber and parts that go into those homes. If builders pull back on new projects, the company sells less.
However, the labor shortage also pushes builders toward the factory-made parts that Builders FirstSource specializes in. Because these parts arrive ready to install, they require fewer workers on the job site. This shift could help the company keep its profit margins even if the total number of new homes being built starts to drop.
Source: WSJ
After Builders FirstSource reported its October results, we updated our fair value. We lowered our rating from Buy to Watch. We have added the cost impact of Canadian import tariffs and the amount of cash tied up in unpaid bills and inventory to what we track. We also cut our expectation for how much profit the company converts into free cash flow and lowered our total revenue projections for the year.
The company reported $3.85 billion in revenue for the quarter, a small drop from last year. This decline was mostly due to a slower environment for housing starts, which is the number of new home construction projects that have begun. While fewer new homes being built means less demand for lumber and parts, the company managed to keep its profit margins at about 28 percent.
This margin level is an important signal for the business. It suggests that even when the housing market is in a slump, the company can still earn a decent profit on each sale by focusing on manufactured components like roof trusses rather than just raw wood. As long as these margins stay steady through the current rough patch, the company should be in a strong position whenever homebuilding activity eventually picks back up.
See the full quarter, and how our tracked metrics did
Source: 8-K filing
Loop Capital changed its rating from buy to hold on Monday. This follows a similar move by William Blair last week, as analysts weigh the impact of a slow housing market on the company's upcoming results. The average price target across all firms now sits at $73.
While the company has been buying back its own stock to support the price, high mortgage rates continue to limit new home construction. This makes it harder for the business to grow its sales of manufactured parts like roof trusses and wall panels, which are its most profitable products.
Source: Loop Capital
William Blair lowered its rating on the company to Market Perform, which is a neutral grade. This change comes just days before the company is set to share its latest financial results on October 29. The average price target across all analysts who follow the stock now sits at about $77.
While the stock has fallen significantly this year, this downgrade suggests a more cautious view on how quickly the housing market might recover. For a company that sells building materials, its profits are closely tied to how many new homes are being started. If high interest rates keep homebuilding slow for longer than expected, it could delay the growth we expect to see from the company's more profitable manufactured parts business.
Source: William Blair
Management has a history of clearing their own targets, though three misses earlier this year suggest they are still adjusting to a slower housing market.
| Expectation | |
|---|---|
| EPS | $0.66 |
| Revenue | $3.37B |
Follow Builders FirstSource to get the latest and most important updates.
Follow BLDR