US Edition
Which companies do you think rank among the top-performing fund managers’ 10 favourites in the world?
Chances are that out of the more than 56,000 listed on stock markets globally, a Texan building materials supplier wouldn’t be the first to spring to mind.
Yet Builders FirstSource has achieved just such status. America’s largest builders’ merchant is one of the most popular stocks in the portfolios of the top-performing 3pc of equity fund managers tracked by the financial publisher Citywire.
Twenty-two of these investors hold shares in the company, resulting in Builders FirstSource’s top AAA rating from Citywire Elite Companies, which rates companies on the basis of their backing by the best-performing fund managers.
Despite its relatively small market value – for the US market – of $14bn (£11.5bn), Builders FirstSource is a top-10 holding for eight of these top-performing managers. Examine the shares’ recent performance and it’s not hard to see why: in sterling terms they have delivered a 246pc return over the past three years.
That good run has continued this year. The shares have returned 67pc in sterling terms in 2023, despite a downturn in Builders FirstSource’s business. That’s a paradox that should normally raise alarm bells among investors.
After 10 years of consistent rises, operating profits are expected to fall this year after sales and profits have been lower than in the previous year in each of the past three quarters. Builders FirstSource has been hit by the downturn in the US housing market as rising mortgage costs have weighed.
Yet the impact looks like it won’t be as bad as first feared: Wall Street analysts have more than doubled their 2023 earnings forecasts for the business since the turn of the year. Profits are still expected to be below 2022’s record, but the shortfall won’t be as big as once thought.
That renewed optimism is down to both a change in Builders FirstSource’s market conditions and improvements it has been making to its business.
After hitting a three-year low in July last year, new home sales – a major generator of business for Builders FirstSource – have been on the rise in America despite rising mortgage costs. They are helping to fill the gap in housing supply left by a slump in the number of existing homes for sale while owners are reluctant to move and get a new mortgage.
As market conditions improve, Builders FirstSource has also been striving to make itself more profitable.
The company makes roof and floor trusses, wall panels, vinyl windows and engineered wood. It also supplies finished wood products and provides services related to the design, installation and management of building products. Its main customers are housebuilders and repair and remodelling contractors.
Heavy investment in factory automation has improved efficiency and given Builders FirstSource a cost advantage over competitors that will be very expensive for them to copy.
This has helped it sell a higher proportion of higher-margin value-added products such as house frameworks, panels and “millwork” – window frames, stairs and the like. These products help its customers to build homes faster and with lower labour costs, while Builders FirstSource gets a richer price and better margin in return.
After exceeding 30pc for the first time in 2022, analysts now expect the company’s gross profit margins to remain above that level for the next three years.
Underpinning its appeal to investors is the prodigious amount of cash it generates. The company’s cash conversion ratio – a measure of how much of its profits are delivered as cash – stands at 93pc.
While Builders FirstSource doesn’t pay a dividend, it has used this cash to buy back huge numbers of its shares since a major merger with rival BMC in 2021.
In just under two years to the end of June, the company spent $5.7bn buying back 41pc of its shares, boosting its earnings per share in the process. Cash is also used to repay debt, although the balance sheet looks sound with net debt of less than annual profits on the “Ebitda” (earnings before interest, tax, depreciation and amortisation) measure.
Despite the shares’ strong run, they still offer a forecast free cash flow yield of 10.8pc. Some of the best-performing fund managers in the world clearly see that as good value given the company’s momentum. This column agrees.
Questor says: buy
Ticker: NYSE:BLDR
Share price at close: $109.28
Phil Oakley is a contributing journalist for Citywire Elite Companies
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