10-Minute Investment Autopsy No. 8: Builders FirstSource
A near-dead cyclical at $2 became a 50-bagger. The investor made a good return, but why did he sell most of it so early?
If you haven’t read the guide to the 10-Minute Investment Autopsy series, you can find it here. You will get the most out of each case if you:
Pause after the “Original Thesis” section and think about what you would have done
Engage with the discussion questions and other members in the weekly thread designed to help you further improve your investing process
The Original Thesis
Who: Robert (Bob) Robotti
When: August 2011
What: Builders FirstSource (ticker: BLDR)
The Thesis:
Company is a value-added distributor to homebuilders.
End-demand has declined sharply due to new housing starts falling to around 450K in 2010 vs. Bob’s estimate of long-term normalized level of between 1M and 1.5M units.
The top 4 players in the industry have been consolidating the smaller regional and local competitors. This should lead to more rational competition once demand normalizes.
Homebuilders have been relying on Builders FirstSource and its competitors on more profitable value-added products such as sub-assemblies of wall panels and floor trusses as opposed to just lumber and supplies.
The company has $60M in cash and is burning through $40M per year at the current rate. While dilution is a risk, given the strong shareholder base Bob doesn’t believe that a bankruptcy is. He believes that there is such large upside in the shares that even in a scenario where additional capital needs to be raised on distressed terms there will still be meaningful upside per the new share.
Using the normalized new housing starts range of 1M to 1.5M Bob believes that sales should range between $1.5B and $2.5B. At a normalized EBITDA margin of 10% and a mid-cycle EV/EBITDA multiple of 7-8x the shares should trade between $11 and $18 vs. the recent $2.09 price.
These are the highlights of Builders FirstSource then-recent financials up to the point when Bob was presenting his thesis:
This is the stock chart up until the time that Bob presented his thesis:
Pause here. Think through the thesis and the facts and decide what you agree with, what you disagree with and whether you would invest based on the information available.
What Happened (Just the Facts)
Builders FirstSource’ financials following Bob’s presentation were as follows:
Between 2010 and 2017, sales grew at a 37% CAGR, EBITDA went from a loss to $464M and EPS went from a loss to $1.27 per share.
Over the 5 years after Bob presented his thesis, the stock produced a total return of 46% per year, far exceeding that of both the S&P 500 and Russell 2000 indices.
There is a lot more to the case:
The Autopsy - the reasons for what happened
The Lessons that you can apply to your own investing
Discussion Questions for you to think about and discuss with other thoughtful investors in the weekly case thread