It is a rare and celebratory occasion when a stock rises by more than 65% during twelve months. Still, it is even more extraordinary when the same stock has an additional 28.5% rally upon quarterly earnings announcements. To top this performance record off, analysts at Barclays are now raising their target prices on the same company, assigning a potential upside that provides another double-digit rally opportunity. 

Builders FirstSource (NYSE: BLDR) hast left its competitors in the dust; despite a most challenging 2022 full of rising input costs and an interest rate hiking schedule, the remainder of 2023 and as far as markets can see into 2024, this stock has much momentum to burn through. After delivering a surprising earnings beat during their first quarter 2023 results, the company is now riding on the tailwinds of such a win; Barclays' $160 price target may reflect a more robust and much deeper force at play in the industry.

Not Out of Breath Yet

Builders FirstSource has also outperformed virtually every peer in its industry by double digits. Names like Masonite International (NYSE: DOOR), Masco Corporation (NYSE: MAS), and even Owens Corning (NYSE: OC) saw BLDR stock blow past them by as much as 66.9% during the past twelve months. Despite Builders FirstSource almost doubling in the past year, the stock still seems to have a considerable gap to fill, as its valuation metrics point to severe undervaluation. 

Builders FirstSource currently sells for a 7.5x price-to-earnings multiple, where a 14.0x to 18.0x range is more of a typical valuation for this stock. Not only is this a significant price-to-value discrepancy in the individual company, but it is also a sign of significant upside compared to the overall peer group. For example, Masonite International trades at an 11.5x multiple of earnings; despite severely underperforming BLDR, Masco Corporation sells for a similar 14.5x while also falling significantly behind BLDR.

Owens Corning is trading at a similar discount since it sells for only 8.3x its earnings. However, on a profitability basis, it still falls deep into underperformance relative to Builders FirstSource. While Owens Corning delivered an ROIC (Return on Invested Capital) rate of 13.74% for the past twelve months, Builders FirstSource achieved a 24.3% rate for its investors and implemented an aggressive share repurchase program. Buying back shares in a business delivering such high clips of returns will only amplify compounding effects, alongside increasing ownership for existing shareholders as they will own an increasing share of a growing pie.

Tailwinds at Play

According to sources at CNN, and other economic data suggesting similar trends at work, the United States housing market is experiencing an inventory shortage, unable to tend to the currently rising demand in the real estate market. In addition, the building permits data survey provided by the FED showcases an exciting dynamic; as mortgage rates rose to nearly 7% during 2022, the application and approval rate for building permits slowed down significantly. 

However, after this slowdown, there was a brief pause in the decline of applications and approval rates. As of the past two quarters (six months), permits have hovered within a tight range which can signal a degree of indecision on the part of builders and lenders since there is no clear direction of where the market will go next. Considering that there is a current shortage of housing which faces an increased demand for available homes, one of the initial catalysts that investors can look for is an increase in the building permits volume.

Within Builders FirstSource's first quarter 2023 presentation, management points to full-year guidance which may provide a few clues to investors looking for a more directional view into the industry. With capital expenditures expected to fall within the range of $325 and $375 million for the remainder of 2023, which would represent an implied third of net sales for the year, some can assume that there is going to be some increased turnover in the company's inventory.

The same guidance scenarios assume a contraction in single-family housing starts for the United States, where the median assumption sees a 10% to 20% decline in units. However, housing starts data similarly suggest a pause in previous reductions; therefore, an upside breakout in permits will subsequently push these numbers higher. Under a recovery scenario, Builders FirstSource financials will advance enough to fulfill the $160 per share target.