Housing prices are skyrocketing. Much of this has to do with simple supply and demand. There is a ton of excess demand in the market and not enough single-family housing, which is pushing prices to their highest level ever. According to Realtor.com, the U.S. is short 5.8 million single-family residences.
With this in mind, the construction industry has entered a secular uptrend that should last for many years. Building products supplier Builders FirstSource (BLDR 1.90%) and its shareholders have a terrific opportunity to capitalize.
NYSE: BLDR
Key Data Points
Massive secular tailwinds
So how did we end up with such an imbalance between supply and demand? To answer this, we need to look back to the housing crisis of 2008 and the subsequent Great Recession. After the market crashed, there was little demand for new housing, what with all of the foreclosed homes available, so housing starts plummeted. Housing starts is the term used to describe new residential construction projects beginning in a particular period.
Inage source: Getty Images
This graph shows the massive reduction in home construction during the Great Recession, and all the while, our population continued to increase. Even now, the number of housing starts is well below 2007 levels, which indicates a tremendous runway remaining.
US Housing Starts data by YCharts
Builders FirstSource is capitalizing
Builders FirstSource is capitalizing on this growth in several ways. First, the company is ramping up its mergers and acquisition (M&A) strategy. Beginning with the blockbuster merger with BMC, the M&A activity has continued in earnest. The company has focused these efforts strategically to gain traction in the most prominent, fastest-growing markets.
For example, the company acquired Cornerstone Building Alliance in 2021, which services Maricopa County, Arizona -- one of the fastest-growing counties in the country. In 2022, the company has also added National Lumber, the largest independent supplier of materials in New England. Builders FirstSource now has a presence in 85 of the top 100 metro areas of the country.
The additions of WTS Paradigm and Apollo Software Assets will bolster Builders FirstSource's digital offerings as the company prepares for the next generation of building processes. Paradigm's software enables virtual home design, quoting and estimating services, ERP software, and many other functions. The acquisition of Apollo will support this digital strategy.
Many additions also add to the company's ability to provide value-added products. These products include prefabricated products, windows, doors, and millwork. Value-added products are higher margin than lumber sales, making them incredibly important to the company and shareholders.
With the labor market as tight as it is, value-added products are a terrific tool for contractors. In 2021, value-added core organic sales grew 28%, led by manufactured products, which grew 56%. This is a clear indication that builders see value in these products, an excellent sign for Builders FirstSource's future profits.
Record sales and massive share buybacks
Net sales for 2021 came in at $19.9 billion. This is tremendous growth over 2020 due to acquisitions; however, organic growth was also 21%. Adjusted EBITDA was equally impressive at $3.1 billion. Builders FirstSource reports over $1.5 billion in free cash flow for 2021 and forecasts $1.6 billion to $2 billion in 2022.
Perhaps the best indicator that management's strategy is working is in the margins. In fiscal 2021 the GAAP gross margin and GAAP operating margin were 29% and 12%, respectively, up significantly from the 26% and 6% posted in 2020. Adjusted EBITDA margin increased as well, from 8.2% in 2020 to 15.4% in 2021.
Builders FirstSource is returning a significant portion of its impressive capital to shareholders through stock buybacks. Stock buybacks, also called share repurchases, reduce the number of shares available on the open market. This increases the value of existing shares and earnings per share. In 2021, the company repurchased approximately $2 billion worth of shares. The company also authorized additional repurchases of $1 billion. This new authorization amounts to over 7.5% of the company's current market cap.
The stock has performed admirably over the past year, rising over 70%, although it is down nearly more than 10% year to date. With the stock currently trading at a forward price-to-earnings (P/E) ratio under 9, this stock could continue to provide market-beating returns to long-term shareholders.
