Builders FirstSource Inc (NYSE:BLDR) Passes Key Quality Investing Filter

For investors looking to assemble a portfolio of lasting, high-performing businesses, the quality investing method provides a structured system. This system centers on finding companies with durable competitive strengths, reliable earnings, and sound financial condition, with the goal of owning them for many years. One useful instrument for this process is the "Caviar Cruise" stock filter, which selects for measurable signs of quality, like persistent revenue and earnings expansion, elevated returns on capital, and healthy cash flow production. A recent run of this filter identified Builders FirstSource Inc (NYSE:BLDR) as a name for more detailed review.

Performance and Profitability Expansion

A central idea of quality investing is a proven record of expansion, not only in sales but, more critically, in operating earnings. The Caviar Cruise filter demands a five-year compound annual growth rate (CAGR) for both revenue and EBIT (earnings before interest and taxes) to be above 5%. Also, it requires that EBIT expansion exceeds revenue expansion, pointing to better operational efficiency and possible pricing strength.

Builders FirstSource shows a noteworthy profile on these measures, though with a distinct recent change:

• EBIT Expansion (5Y CAGR): 32.41%. This number is far above the 5% minimum, showing a strong multi-year rise in core operating profits.
• Revenue Expansion (5Y CAGR): 1.08%. This low number is just above the filter's limit but does not give the full account. The company's sales path has been significantly affected by its major merger with BMC Stock Holdings in early 2021, which changed its size and market standing.
• EBIT Expansion > Revenue Expansion. The large gap between its excellent EBIT expansion and more limited revenue expansion clearly meets this filter. It implies the company has ably used its scale, achieved major benefits from its merger, and enhanced its operating margins over the time.

Effective Use of Capital and Financial Condition

Quality investors favor companies that produce high profits on the capital put into the business. A high Return on Invested Capital (ROIC) shows a lasting competitive advantage and skilled leadership. Financial strength is also vital, judged by a reasonable debt level compared to the cash the business produces.

Builders FirstSource performs favorably on these strict financial condition tests:

• Return on Invested Capital (ex. Cash & Goodwill): 19.50%. This is well above the filter's 15% standard. It shows that the company's core activities are very profitable and that leadership has used capital efficiently to create large returns.
• Debt to Free Cash Flow Ratio: 4.35. This ratio, which calculates how many years of present cash flow would be required to clear all debt, is inside the filter's goal of less than 5. It points to a reasonable debt level that does not greatly risk the company's financial soundness.
• Profit Quality (5Y Avg.): 102.16%. This measure, which matches free cash flow to net income, is above the 75% filter. A number over 100% means the company is producing more cash than its reported profits indicate, a signal of very good earnings strength and healthy working capital control.

Fundamental Analysis Summary

An inspection of Builders FirstSource's wider fundamental picture shows a varied but getting better situation. The company's profitability measures, like Operating Margin and Profit Margin, have displayed upward trends in recent years, matching the filter's more exact standards for margin improvement. Its price seems fair compared to both the building products sector and the wider market, with a Price-to-Earnings ratio of 15.45 being lower than the S&P 500 average.

However, the inspection also sees difficulties. The company's latest ROIC and margins, while better than past levels, are now under their three-year averages, mirroring the cyclical softening in the housing market. Also, short-term analyst forecasts predict a decrease in earnings, emphasizing the macroeconomic vulnerabilities present in the housing sector. A complete listing of these positives and negatives is provided in the full fundamental report for BLDR.

Context for the Quality Investor

When evaluated using the Caviar Cruise standards, Builders FirstSource presents a solid case. It displays the main numerical characteristics quality investors want: outstanding historical profit expansion, high returns on capital, healthy cash conversion, and a firm balance sheet. The company's national size, combined business model, and value-added product lines support the competitive strengths and pricing ability that support these financial outcomes.

It is important to recall that a stock filter is a first step, not a final answer. The filter finds companies that meet certain numerical tests, but a complete quality investing evaluation must also review non-numerical aspects like the skill of leadership, connection to long-term industry shifts, and business model endurance through economic periods. For Builders FirstSource, the cyclical character of its main market is a key element for any investor to consider.

The Caviar Cruise filter can aid in finding other companies displaying these basic quality measures. You can review the present filter results and system more via this link.

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Disclaimer: This article is for informational purposes only and does not constitute financial advice, an endorsement, or a recommendation to buy, sell, or hold any security. Investing involves risk, including the potential loss of principal. You should conduct your own research and consult with a qualified financial advisor before making any investment decisions.