Today’s recommendation is a housing industry turnaround candidate from George Putnam’s The Turnaround Letter.
“Builders FirstSource, Inc. (BLDR) is a leading supplier and manufacturer of building products for residential construction. It operates in nine states, primarily in the Mid- Atlantic and Southeast plus Texas.
“The company was formed in 1998 through a leveraged buyout of the building products division of Pulte Group, a major homebuilder. It went public in 2005, just in time to catch the crest of the home building bubble. The stock peaked above 26 in early 2006 before beginning a steady decline to the lower single digits, where it has been since late 2008.
Analysis
“Builders FirstSource strikes us as a superior (albeit moderately risky) way to play the likely rebound in residential construction. Rather than betting on a single home-builder, Builders FirstSource supplies many of the largest homebuilders in some of the fastest growing parts of the U.S.
“Although the company was hurt by the industry downturn, it has the potential to rebound strongly for a couple of different reasons. First, it has become much more efficient, cutting out more than $140 million of operating expenses since 2007. Perhaps even more importantly, many former competitors have been forced out of business during the downturn. As a result, Builders FirstSource’s market share has grown steadily in recent years.
“The management team is very experienced. Both the CEO and the Senior VP of Operations have more than 40 years of experience in the industry, and many other key executives have more than 20 years in the business.
“The balance sheet remains quite leveraged, which is the biggest risk to the stock. However, the company appears to have enough liquidity to get by even if housing starts don’t turn up significantly for another 18-24 months. In addition, major stockholders include some very deep-pocketed private equity firms such as JLL and Warburg Pincus. They have a strong incentive to not only keep the company alive, but eventually to see its stock appreciate significantly.
“There are encouraging signs that the business is starting to turn. Revenues were up 11% in 2011 compared to 2010, with improving margins. The first quarter of 2012 was even better, with revenues nearly 35% higher than the year ago quarter. Moreover, U.S. single-family home starts were up almost 17% compared to the first quarter in 2011.
“The stock has begun to respond, but we think it has a lot further to go. The housing industry is still down more than 70% from its peak, and even a modest rebound would bode very well for the company. We recommend buying Builders FirstSource up to 7.”
- George Putnam, III, The Turnaround Letter, May 2012