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Builders FirstSource (BLDR) Up 95% in a Year: More Room to Run?

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Builders FirstSource, Inc. (BLDR - Free Report) is benefiting from solid demand arising from robust residential housing market and repair & remodeling (“R&R”) activity. Moreover, the company’s focus on cost savings and strategic acquisitions bodes well. Shares of Builders FirstSource have surged 94.6% in the past year compared with the Zacks Building Products – Retail industry’s 25.8% growth.

Let us discuss the factors that are driving the Zacks Rank #3 (Hold) company, despite rise in commodity prices, supply-related challenges and stiff competition. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Factors Driving Growth

Concentration on Cost Savings: Builders FirstSource completed the merger with BMC Stock Holdings on Jan 1, 2021. Through this merger, the company’s customer outreach across the country will increase many folds and that will deliver larger economies of scale. Builders FirstSource’s elevated scale and a very comfortable balance sheet position enables it to anticipate an annual run-rate synergy of $130-$150 million by the end 2023. Also, the company is on its course to realize $60-$70 million of its targeted cost synergy by the end of 2021. The company continued its cost leverage on higher sales and robust expense controls offset higher variable costs. Builders FirstSource is focused on cost-saving initiatives and implementing various plans for the same.

Inorganic Strategies: Acquisitions are an important part of Builders FirstSource’s growth strategy to supplement organic growth and expand across vast geographic boundaries. On May 24, the company announced that it will acquire Alliance Portfolio’s business. This will likely expand the company’s reach in Arizona and other fastest-growing areas of the country. On May 7, Builders FirstSource acquired a family-owned, leading supplier of lumber and other building materials company — John’s Lumber. The acquisition will improve Builders FirstSource’s product portfolio and expand its reach within Michigan. Also, the acquisition of BMC will help it increase geographical reach in a highly-fragmented industry, enhance value-added offerings and generate higher level of free cash flow to invest in growth. Before BMC merger, the company integrated 43 acquisitions since 1998. During first-quarter 2021, acquisitions contributed to net sales growth of 2.4%.

Strong R&R Demand: Of late, Builders FirstSource is observing increased in demand for housing amid a long-term shortage of housing supply. Housing markets have been showing resilience of late, given low mortgage rates. With the opening of the economy, demand for housing and building material products is improving given the increasing trend of consumers to invest more in homes amid the pandemic. Revival of housing demand has been a boon for Builders FirstSource and companies like Beacon Roofing Supply, Inc. (BECN - Free Report) , Fastenal Company (FAST - Free Report) , Lowe's Companies, Inc. (LOW - Free Report) and others in the industry.

In the last reported quarter, the company’s core organic sales increased 22% on robust demand of single-family housing, R&R and other activities.

Investments in Digital Platform: Builders FirstSource is focused on investing in innovations and enhancing digital solutions for its customers. The company is raising investments to support technology and automation that will deliver operational excellence as well as boost sales volume. The standardization and automation processes and technology-based workflows will minimize costs, streamline business operations and enhance working capital. During first-quarter 2021, the company adopted new logistics technology, mainly delivery and dispatch management system. This helped it increase the company’s delivery efficiency by 20%.

 

Zacks Investment ResearchImage Source: Zacks Investment Research

 

Concerns

The company is witnessing inflation related to raw materials. During January and February 2021, commodity costs grew to its all-time high. The company is encountering supply-related challenges with respect to some of the products including OSB, plywood, lumber and particleboard, thereby leading to the price hike.

Although the demand for single-family residential housing remained very high, the company faced troubles meeting those demands due to labor and material-availability constraints.

The company witnessed volatility in the lumber market throughout 2020. Being a nationwide supplier of building material, the company is very susceptible to fluctuations in market prices for such commodities.

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