Builders bounces back

Builders FirstSource (NYSE:BLDR), after a month of decline, seems to have found its floor and taken a big step back toward its historic range. The stock price had held onto most of its morning rally and closed 6.8% to $151.15. Volume was consistent with the 10-day average.

Builders had been bleeding market cap since its May 7 earnings release, when it tumbled from its $200 per share perch. The company revealed that quarterly gross profit had dissipated year-over-year despite higher revenues. Management chalks this up to a change in the mix of its business, which is making and selling building materials, manufactured components and construction services throughout the U.S. When it revealed that it had focused more on early-stage homebuilding commodities and gained exposure to lower-margin multi-family construction, investors revolted.

This might have been short-sighted. The U.S. building boom isn't ending anytime soon, although high mortgage rates have clearly made a dent. Migrating away from the single-family home arms race and toward the underserved apartment market is an entirely defensible strategic choice. And a name that's 40% owned by Vanguard, BlackRock, Wellington and Fidelity -- and 2% owned by insiders -- ought to be better insulated against this-quarter-ism.

Today's news

Today's rescue appears to come at the hand of RBC Capital Markets, whose analysts have been a longstanding cheerleading squad for Builders. The Canadian investment bank filed with the Securities and Exchange Commission a prospectus for callable contingent coupon barrier notes linked to Builders' share price. In other words, RBC is sweetening the deal by issuing coupon payments if, and only if, BLDR performs as projected.

Meanwhile, the second quarter isn't over yet and its earnings won't me revealed until late July. Until then, nobody's talking bottom-line and no other news has yet been made public. Still, three directors told the Securities and Exchange Commission June 4 that they had acquired bigger stakes. None reported recent selling.

The numbers

Builders' annual sales totals about $20 billion, with a market cap in the same ballpark. The stock is roughly in the middle of its 52-week trading range, so there's potential downside as well as upside. Still, options pricing suggests that a strike price as high as $175 is a reasonable bet.

But let's talk about the price-to-earnings ratio. How can a company be anything but undervalued at 13x, trailing 12 months? For comparison, that's one-third of the S&P 500, of which the Irving, Texas, -based company is a component. The Industrials sector and Building Products & Equipment industry tend to lag that overall number, but they're still at 30x and 22x, respectively.

To answer our own rhetorical question, the balance sheet is a little shabby. Liabilities exceed equity value, and half the assets have nothing to do with cash, receivables, inventories or property, plant and equipment.

While Builders remains a darling of the analyst class, has a valuation case to make and shows strong long-term technical signals, fundamental and short-term technical factors have a different story to tell.

Stocks.News does not have positions in companies mentioned.