BLDR - Valens Credit Report - 2017 10 24
- Credit markets are materially overstating credit risk with a cash bond YTW of 7.769%, relative to an Intrinsic YTW of 5.529% and Intrinsic CDS of 353bps. Similarly, Moody's is materially overstating BLDR's fundamental credit risk, viewing the firm as a highly speculative, high-yield B2 credit, six notches lower than Valens' IG4 (Baa2) rating
- Incentives Dictate Behavior™ analysis highlights that although it may lead to increased leverage, management's compensation framework focuses them on all three value drivers, which should incentivize them to improve cash flows. Additionally, management members are well aligned with shareholders for long-term value creation - Earnings Call Forensics™ of the firm's Q2 2017 earnings call (8/4) highlights that management is confident about the potential of their new component plants
- BLDR is currently trading at a 15.5x UAFRS-based (Uniform) P/E, which is near historical averages. At these levels, the market is pricing in expectations for declines in Uniform ROA, likely expecting the firm to be unable to sustain recent operational improvements, and face potential macroeconomic headwinds. As such, if the firm is able to just maintain profitability at current levels, equity upside would be warranted
Builders FirstSource, through its subsidiaries is a supplier and manufacturer of building materials, manufactured components and construction services to homebuilders, sub-contractors, remodelers and consumers. The company provides a solution to its customers providing manufacturing, supply and installation of structural and related building products. The company's manufactured products include factory-built roof and floor trusses, and wall panels and stairs. The company also assembles interior and exterior doors into pre-hung units. Additionally, the company supplies its customers with building products not manufactured by the company, such as dimensional lumber and lumber sheet goods and various window, door and millwork lines.
In 2009, just as the dust was settling from the last major equity and credit market crises, we launched a boutique research firm with the intention of breaking Wall Street’s biases and broken incentives:
- GAAP and IFRS have failed to provide rules for reliable financial statement reporting
- Stock analyst recommendations are not grounded in disciplined financial analysis
- Credit agencies have been set up to grossly fail in their responsibilities to investors and the public markets
- Utter lack of willingness of major research firms to employ the the most advanced forensic analysis available
We sought to provide investors and company analysts with a source of information that changed all that.
Many years later, our business model remains because little has changed on Wall Street.
- Corporate credit ratings remain years behind the fundamental underpinnings of company performance
- Stock analysts continue to make recommendations with deeply inherent biases
- Research firms have failed to break down the walls between credit, equity, and macroeconomic research
- The governing accounting bodies have created more leeway for mis-estimates and mis-classifications as financials have become unwieldy and overwhelming
The integrity of Valens Research is founded in our disciplined processes and analytics. No “star” analysts. No corporate advisory relationships. No-nonsense opinions and recommendations.
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