What's Wrong With This Stock? | Builders FirstSource ($BLDR) | PULSE Framework

Builders FirstSource was one of the big winners of the last 20 years. Now the stock is down 50% from its highs. Is it interesting here?

Every Tuesday I apply the PULSE framework to a new stock to illustrate the process. The framework combines 5 fundamental signals across all 3 financial statements to quickly place a stock into one of 3 categories:

• Not interesting

• Attractive company at a high price that maybe interesting later

• Attractive company at an interesting price

This isn't a stock recommendation system. It's a triage tool designed to answer one question before you spend hours on research: is this worth a deeper look now? If you want to do this yourself for any stock, you can get the PULSE template here.

Let’s get to Builders FirstSource ($BLDR), a subject of one of our earlier 10-Minute Investment Autopsies, and put it through the framework to see if it's worth more research.

The “P” stands for Economic Profit, and here is what BLDR’s looks like:

• That chart is attractive overall: positive and rising Economic Profits

• The last 5 years saw a big spike followed by a sharp decline. This could be signs of cyclical issues, and I would investigate this further if I were to do more research

The “U” stands for Underlying FCF, and here is what BLDR’s looks like:

• Underlying FCF is attractive, positive and rising over time

• The conversion to Net Income is good at 90%

• We see the same sharp up-and-down pattern over the last 5 years that we saw with Economic Profits, again something to investigate further

The “L” stands for Financial Leverage, here is what BLDR’s looks like:

Leverage looks OK, but not great. I would want to make sure that if the profits were to cyclically decline further there would not be any debt covenant issues. However, I don’t consider this level of debt, especially after the profits already dropped substantially, to be disqualifying.

The “S” stands for Smoothed Underlying FCF yield, here is what BLDR’s looks like:

Note that the goal is to be approximately correct, not precise. We are screening here to decide if the stock is worth doing more work on, so it’s OK to be a bit off.

For BLDR, the FCF yield is very attractive - think of it as the stock trading at < 5x FCF.

The “E” stands for EV Cap Rate, which for BLDR is:

The EV Cap Rate is a nice complement to the Smoothed FCF yield for two reasons:

1. The EV Cap Rate is based on the more recent last 12 month profits

2. It looks at the whole capital structure, not just the equity

For BLDR, the 8% EV Cap Rate is interesting, as it essentially implies no growth from these levels despite the large recent declines in profit.

Putting It All Together

Let’s put all 5 PULSE signals together for Builders FirstSource:

• Economic Profits: Good

• Underlying FCF: Good

• Leverage: OK

• Smoothed Underlying FCF Yield: Very Interesting

• EV Cap Rate: Interesting

Conclusion: Based on the PULSE framework, Builders FirstSource is interesting and deserves more research.

Do you want to get the PULSE template so that you can save many hours screening stocks and focus on the highest-potential opportunities? You can get it here.

Every Friday I plan to publish a video post going through 3-4 stocks with the PULSE framework. The posts will be free, but only paid subscribers can request which stocks I look at. If you are a paid subscriber, please leave a comment with your request, post it in the PULSE chat or send me a DM.

Please support my work by restacking this post if you found it useful.

Disclaimer: Not financial advice, for educational purposes only.

About the author

Gary Mishuris, CFA is the Managing Partner and Chief Investment Officer of Silver Ring Value Partners, an investment firm that seeks to apply its intrinsic value approach to safely compound capital over the long-term. He also teaches the Value Investing Seminar at the F.W. Olin Graduate School of Business.