TRG | The Bottom Line – 3/11

In an environment of rapid inflation, we are finding that Wall Street shoots first and asks questions later in terms of stock valuations. Builders FirstSource (BLDR) is a name TRG highlighted this week as a hidden value given the dislocation of value. While BLDR stock has nearly doubled since TRG’s focus early summer 2021, the stock today still trades at a glaring discount relative to its peers. Lumber is a critical component of building homes, yet is being attributed no value for BLDR, despite being an extremely valuable commodity right now. Lumber is feeding into this timely value-creation opportunity for BLDR as the stock is low and the elevated commodity price is providing an abundance of excess EBITDA and cash flow, which is enabling BLDR to repurchase stock at highly-discounted levels. The “base” business of BLDR, which embeds lumber at $400/mbf, is selling at 5x EV on the EBITDA of the base in FY’22 vs. building product distribution peers at much higher multiples (on NTM: IBP 10.0x, BLD 10.5x, GMS 6.3x). We believe BLDR’s base will show at least 15-17% incremental margins in the coming years, which is in-line with the steadily high levels of IBP and BLD. If one simply assumed long-term growth targets from 2021-2025 (CAGR – sales 10%, EBITDA 15%), this implies high-teens.  As such, we believe the base business of BLDR is extremely undervalued at 5x on FY’22.