Even though Builders FirstSource (currently trading at $122.51 per share) has gained 7.4% over the last six months, it has lagged the S&P 500’s 30.6% return during that period. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
Is now the time to buy Builders FirstSource, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free for active Edge members.
Why Is Builders FirstSource Not Exciting?
We don't have much confidence in Builders FirstSource. Here are three reasons you should be careful with BLDR and a stock we'd rather own.
1. Revenue Tumbling Downwards
Long-term growth is the most important, but within industrials, a stretched historical view may miss new industry trends or demand cycles. Builders FirstSource’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 7.2% over the last two years. 
2. EPS Took a Dip Over the Last Two Years
While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.
Sadly for Builders FirstSource, its EPS declined by more than its revenue over the last two years, dropping 22.1%. This tells us the company struggled to adjust to shrinking demand.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Builders FirstSource’s ROIC has unfortunately decreased significantly. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Builders FirstSource isn’t a terrible business, but it doesn’t pass our quality test. With its shares trailing the market in recent months, the stock trades at 19.3× forward P/E (or $122.51 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better investments elsewhere. We’d suggest looking at one of Charlie Munger’s all-time favorite businesses.
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