A Tale of 3 Homebuilder Stocks – 2 to Buy, and 1 to Avoid

The Street can’t stop buzzing about Homebuilder stocks as the combination of greater affordability and lower mortgage rates are providing the sector with encouraging signs.

Coincidentally, in a recent report to clients, BTIG’s Ryan Gilbert initiated coverage on several building products distribution and installation companies. Basically, the sort of companies which can be described as the ones connecting building product manufacturers with homebuilders.

Gilbert noted, “We believe that a moderate re-acceleration in housing starts in 2020 will exacerbate the labor shortage challenges that homebuilders are currently facing. The distributors offer partial solutions to this challenge and can leverage a tighter labor market to raise price and expand margin.”

With this information in hand, we delved into the market data from TipRanks.com to get the lowdown on 3 of Gilbert’s choices, two of which the analyst thinks are set to shine in 2020, and one whose prospects aren’t quite as bright. Let’s dive in:

Builders FirstSource (BLDR)

We’ll start off with the second largest distributor of lumber and building materials (LBM) in the US. Builders FirstSource operates out of 400 locations in 40 states and you could say the company has had a fantastic 2019 as shares are up by 134% year-to-date.

Gilbert thinks 2020 is set to continue the trend. Citing BLDR’s off-site activities as “the cutting edge of construction innovation,” the analyst thinks “increasing structural component adoption should lead to multiple expansion in 2020,” and therefore to higher revenue and EPS growth.

The last three years have seen BLDR opening or purchasing 13 new facilities on top of adding new lines and equipment to established facilities. The additions make BLDR the largest LBM distributor with manufacturing capabilities in the US.

Gilberts thinks the Street is underestimating BLDR’s growth potential, with the analyst forecasting 12% revenue growth, alongside an 18% increase in EPS in 2020. “In our view, as housing starts to re-accelerate in 2020, homebuilders will increasingly turn to off-site construction methods to alleviate labor shortages. BLDR’s core operating and growth strategy since its IPO has been to use its off-site structural component manufacturing capabilities to outgrow the overall housing market,” the analyst said.

To this end, Gilbert initiated coverage of BLDR with a Buy recommendation, and set a price target of $31, implying 22% upside potential over the next 12-months. (To watch Gilbert’s track record, click here)

While not quite as bullish as Gilbert, the Street remains fairly positive on the construction specialist. The consensus breaks down into 5 Buys and 4 Holds, marking BLDR as a Moderate Buy. Following an excellent 2019, the average price target of $26.22 indicates modest upside potential of 2%. (See BLDR stock analysis on TipRanks)

Installed Building Products (IBP)

Displaying a similar growth curve as BLDR, Installed Building Products brought home the bacon in 2019, in the shape of a 111% increase in its stock price. With 175 branches in 38 states, the pure play installer has 28% residential market share and is the second largest residential insulation installer in the US.

Gilbert notes that material price increases by IBP, which took place in the second half of 2017 and throughout 2018, alongside an expansion in the commercial sector driven by the acquisition of Alpha Insulation and Waterproofing, have been “impacting incremental margin.” Heading into 2020, Gilbert believes the company’s target of consistent 20-25% incremental margins is achievable.

“We believe IBP’s multiple will continue to expand because the company is in the beginning stages of a re-acceleration in its incremental adjusted EBITDA margin… Looking forward, we believe insulation pricing will be much more easily navigable in 2020 and believe 3Q19 results demonstrated that the margin drag from commercial is over. As a result, we believe IBP will produce incremental margins in both 2020 and 2021,” the analyst explained.

Accordingly, Gilbert initiated coverage with a Buy rating, alongside a price target of $85. This implies handsome upside potential of 20%, should the target be met.

The Street currently views IBP as a Moderate Buy. A breakdown of 2 Buys and 5 Holds alongside an average price target of $75.43, indicates the pure play installer could be in-line for a 7% uptick to its share price over the next 12-months. (See IBP stock analysis on TipRanks)

BMC Stock Holdings (BMCH)

Although not quite as spectacular as the first two names on our list, BMCH’s yearly gains are not to be sniffed at by any means. The US’s fifth largest LBM distributor has added over 90% year-to-date to its share price, a fantastic figure in anyone’s book.

The contrast, in Gilbert’s view at least, is what 2020 has in store for BMC Stock Holdings.

BMCH has 150 facilities in 18 states, with 55% of last year’s revenue generated by only 3 of those (Texas, California, and Georgia). Gilbert thinks limited exposure in some of the country’s strongest markets (Arizona, Florida, Nevada) will hamper revenue growth in 2020 and outweigh “recent M&A and investment in more manufacturing capabilities.”

Furthermore, the analyst notes, “The millwork, doors, and windows category accounted for just under 30% of BMCH’s LTM (last twelve months) revenue and generates the company’s highest margins.” The analyst believes this category will undergrow in 2020 as “builders continue to shift mix to more affordable entry-level housing.”

BMCH has a strong presence in California and Washington, both “sluggish markets,” though important to the company due to strong adoption of ready-frame and structural components. Gilbert thinks these are likely to constrain growth in 2020. The analyst added, “growth in Ready-Frame sales has stalled, in part because WA and CA are its two largest markets. Ready-Frame grew 37% year-over-year in 2018 but growth has slowed to 0% year-to-date 2019 […] While Ready-Frame’s other markets continue to grow, the pace of growth is much slower than prior periods which suggests that BMCH is finding it challenging to improve adoption of the product outside of the West Coast.”

In accordance with this thesis, Gilbert initiated coverage on BMCH with a Neutral rating, without suggesting a price target.

All in all, Wall Street is fairly divided in its expectations on BMCH. Out of 9 analysts tracked by TipRanks in the last 3 months, the fence sitters rule the majority, with 5 rating the building materials maker a “hold,” while the other 4 say “buy.” With an average price target of $30.25, these analysts see limited upside ahead. (See BMCH stock analysis on TipRanks)

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