Three Reasons Why BLDR is Risky and One Stock to Buy Instead

December 25, 2024 at 04:08 AM EST

BLDR Cover Image

Builders FirstSource has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 9% to $148.82 per share while the index has gained 10.4%.

Is there a buying opportunity in Builders FirstSource, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

We're cautious about Builders FirstSource. Here are three reasons why you should be careful with BLDR and a stock we'd rather own.

Why Is Builders FirstSource Not Exciting?

Headquartered in Irving, TX, Builders FirstSource (NYSE: BLDR) is a construction materials manufacturer that offers a variety of lumber and lumber-related building products.

1. Revenue Tumbling Downwards

Long-term growth is the most important, but within industrials, a stretched historical view may miss new industry trends or demand cycles. Builders FirstSource’s recent history marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 14.7% over the last two years. Builders FirstSource Year-On-Year Revenue Growth

2. EPS Took a Dip Over the Last Two Years

Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.

Sadly for Builders FirstSource, its EPS declined by more than its revenue over the last two years, dropping 16.1%. This tells us the company struggled to adjust to shrinking demand.

Builders FirstSource Trailing 12-Month EPS (Non-GAAP)

3. New Investments Fail to Bear Fruit as ROIC Declines

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

We typically prefer to invest in companies with high returns because it means they have viable business models, but the trend in a company’s ROIC is often what surprises the market and moves the stock price. Unfortunately, Builders FirstSource’s ROIC has decreased over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Builders FirstSource Trailing 12-Month Return On Invested Capital

Final Judgment

Builders FirstSource isn’t a terrible business, but it doesn’t pass our bar. That said, the stock currently trades at 12.7× forward price-to-earnings (or $148.82 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're pretty confident there are superior stocks to buy right now. We’d suggest looking at MercadoLibre, the Amazon and PayPal of Latin America.

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