Builders FirstSource (BLDR) manufactures and supplies building materials, manufactured components, and construction services to professional homebuilders, sub-contractors, remodelers, and consumers in the United States through its subsidiaries.

It is often thought of as just a lumber supplier. However, through organic growth and mergers, acquisitions, it has become much more.

This has made it an essential partner for builders and the nation’s housing requirements. (See BLDR stock charts on TipRanks)

I am bullish on BLDR stock.

Housing Shortage

When the housing market crashed in 2008, it sent the country into a long and deep recession known as the Great Recession. With unemployment at an all-time high, homebuyers were much less.

In addition, many people were left without homes and credit due to the precarious lending practices of previous years. Many people were forced to leave their homes.

The majority of younger adults also returned to their families. The demand for new homes is almost non-existent. The decline in new housing builds, also known as “housing begins”, was predictable.

The number of housing starts fell to levels not seen since the 1960s. This was higher than any previous period. These people stayed in this area for several decades.

In the meantime, America has seen an increase in its total population of over 85% from 1960 to now. Nearly 10 years ago, the Great Recession started in 2008 and housing starts have finally reached their previous averages.

The housing market is in great demand, as the economy has rebounded and there are more incomes. Generation Z, a generation of millennials in their prime earning and family years, is moving out of the city. National Association of Realtors estimates that there is a shortage of 6.8 millions housing units in the United States.

Perfect Timing

In 2020, BLDR merged with BMC Stock Holdings (NASDAQ:) to form a building materials and services giant with exposure to the fastest growing markets in the U.S.

It was also an efficient way to consolidate many expenses and increase margins. The company has used further M&A activity with the acquisition of Cornerstone Building, the largest supplier of building materials in Arizona. The company now has access to Maricopa County, the country’s fastest-growing county. The company expects it to immediately increase earnings.

A second factor is the tight labor market. Builders are also experiencing difficulty finding reliable workers. Contractors can get prefabricated material from Builders FirstSource. It reduces waste on the jobsite, eases labor shortage pains and contractors are more likely to purchase these products again.

Builders FirstSource considers these “value-added” materials to be high-margin and distinct from traditional lumber yards. More than half of the $5.6 million Q2 2021 revenue was generated from other products and services than lumber.

They want to participate in every step of the construction process. WTS Paradigm was also acquired by the company.

Paradigm offers software for builders, including design, drafting and enterprise resource planning. BLDR, taken together, has been an indispensable member of the construction community while there is high demand.

BLDR Revenue and Earnings Growth

The accretive M&A activity and organic growth have had a tremendous positive impact across the board. Gross revenue depends on lumber costs, which customers pass onto. It is useful to begin the analysis at gross profit then work down.

BLDR’s six-month results ended June 30, 2021 saw a 169.9% increase in its gross profit to $2.7 billion. The net income in Q2 2021 reached $497 million. Net income for the six-months ended June 30, 2021 was $669.8 millions.

It has had a positive impact on the bottom line. In Q2 2021 earnings per diluted shares were $2.39 up from $0.67, while they were $0.67 in Q2 2020.

This is despite an increase in shares due to the merger. BLDR trades for a low 10.2 price-to earnings ratio (P/E) as well as a 10.7 forward discount P/E.

Wall Street’s Take

Wall Street analysts are extremely bullish on BLDR stock, with a Strong Buy consensus rating, based on 11 Buys, and one Sell. A BLDR stock price target average of $67.45 suggests a 23.9% upside possibility.

Summary on Builders FirstSource

BLDR stock is the right company at the right time to capitalize on a significant housing shortage.

The U.S. is suffering from underbuilding, which has resulted in several million homes being lost. However, construction tailwinds are expected to last many years.

Builders FirstSource goes beyond a lumber yard. Contractors can see the benefits of their indispensibility through its results.

Disclosure: Bradley Guichard was a member of BLDR when this article was written.

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