What a brutal six months it’s been for Builders FirstSource. The stock has dropped 33.5% and now trades at $119.60, rattling many shareholders. This was partly driven by its softer quarterly results and might have investors contemplating their next move.
Is there a buying opportunity in Builders FirstSource, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is Builders FirstSource Not Exciting?
Even with the cheaper entry price, we don't have much confidence in Builders FirstSource. Here are three reasons why there are better opportunities than BLDR and a stock we'd rather own.
1. Revenue Tumbling Downwards
We at StockStory place the most emphasis on long-term growth, but within industrials, a stretched historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Builders FirstSource’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 12.1% over the last two years. 
2. EPS Took a Dip Over the Last Two Years
Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.
Sadly for Builders FirstSource, its EPS declined by more than its revenue over the last two years, dropping 23.2%. 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. Following the recent decline, the stock trades at 12.1× forward P/E (or $119.60 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're pretty confident there are superior stocks to buy right now. We’d recommend looking at one of our top software and edge computing picks.
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