The analysis and recommendation below is from the March 31st issue of my short seller’s newsletter.
Builders FirstSource (NYSE:BLDR), round two – One stock in particular that continues to baffle me is Builders FirstSource (BLDR – $184.55), which has run from $110 to $208 and back down to $184 since the end of October 2023.
BLDR is essentially a big hardware store and lumberyard chain that also provides pre-fabricated construction components and services to homebuilders and commercial real estate developers.
The Company’s revenues and profits benefited from rampant lumber price inflation between early 2020 and early 2022. But that ship has sailed.
Over the past several years, management has used aggressive, debt-financed roll-up acquisitions along with highly aggressive merger GAAP accounting to project a high-growth business model.
It has also used aggressive share buybacks, also funded with debt, to keep the stock propped up. But over the last four quarters, its revenues and profitability have deteriorated rapidly.
At the same time, it has accumulated a massive amount of debt relative to the size of its balance sheet. Shorting BLDR is a great way to express a bearish view on the housing market and commercial construction activity.
I’ve profited from BLDR in the past, and its financials continue to deteriorate. The Company released its Q4/full-year numbers on February 22nd. YoY for Q4 sales declined 4.7%. For the full-year, sales plunged 25.1% to $17 billion from $22.7 billion in 2022 and $19.8 billion in 2021.
Incredibly, the Company did not provide a full income statement for Q4. But “adjusted” net income declined 6.6% for the quarter. This “as-adjusted” net income was down 38.4% for the full year. The Company has repurchased a massive amount of shares in 2023, polishing up the EPS vs. 2022, which is likely why the stock price is levitating.
But here’s why the terse table with “adjusted” net income is not to be trusted: In the full-year income statement, the stated GAAP net income is $1.54 billion vs. the $1.88 billion “adjusted” net income in the table with the select quarterly numbers – a $340 million difference.
From this, it’s not unreasonable to infer the quarterly GAAP net income was materially lower than what was disclosed in the “as adjusted” table.
There’s an even bigger red flag. The Company spent $1.85 billion for share buybacks in 2023, leaving it with just $66 million in cash at the end of 2023. At the end of February, it issued $1 billion in unsecured 10-year bonds.
The proceeds will be used to pay down indebtedness under an asset-based loan facility (similar to a revolver) and the rest will be used for SG&A. As of the end of 2023, the outstanding amount of debt was $3.2 billion, up from $2.9 billion at the end of 2022.
At the end of 2023, the ABL facility had $464 million drawn. This means that, after paying that down with the bond proceeds, BLDR’s debt load will increase by approximately $500 million.
The book value of the Company is $4.7 billion. However, net of goodwill and intangible assets, the book value is zero. $3.7 billion of debt sitting on balance with a $0 tangible book value for a company in a highly cyclical business heading into a brutal economic downturn is an insane amount of debt.
To be sure, for now, there’s plenty of operating income to cover interest expense. But I anticipate that both residential housing starts and commercial real estate new construction likely will hit a wall in 2024.
For sure office building and multi-family projects, from which BLDR derives a substantial amount of revenue. This will translate into the rapid evaporation of BLDR revenues and cash flow.
Investors/speculators/perma-bulls have a short memory when it comes to chasing highly cyclical momentum stocks higher. With construction-related companies, the revenue and cash flow fountain suddenly turns off.
These companies are left sitting on inventory that suddenly plunges in value. I truly believe the construction sector is on that precipice, as the rapid easing of financial conditions by the Fed since March 2023 has temporarily deferred reality for the real estate sector and construction sector.
BLDR has been a tough short, especially if you didn’t set a stop-loss or used puts. But it’s apparent to me that the fundamentals are deteriorating rapidly for its business model.
The fact that management issued another $1 billion in debt in order to continue buying back shares is a big red flag.
I’m tempted to throw on a long-dated, deep OTM set-and-forget put position. Timing the top in this thing will be tough, if not impossible, but I feel confident that the stock will be below $110, from where it launched at the end of October 2023, within the next nine to twelve months. Right now, I’m eyeballing January 2025 $150s and January 2026 $100s.
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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
