Sales Growth

A company’s long-term sales performance signals its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last five years, Builders FirstSource grew its sales at an incredible 17.6% compounded annual growth rate. Its growth beat the average industrials company and shows its offerings resonate with customers.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade 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 history marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 15.1% over the last two years. Builders FirstSource isn’t alone in its struggles as the Home Construction Materials industry experienced a cyclical downturn, with many similar businesses observing lower sales at this time.

We can dig further into the company’s revenue dynamics by analyzing its most important segments, Manufactured products and Windows, doors & millwork , which are 23.5% and 26.1% of revenue. Over the last two years, Builders FirstSource’s Manufactured products revenue (floors, wall panels, and engineered wood) averaged 16.2% year-on-year declines while its Windows, doors & millwork revenue (self explanatory) averaged 4.5% declines.

This quarter, Builders FirstSource missed Wall Street’s estimates and reported a rather uninspiring 8% year-on-year revenue decline, generating $3.82 billion of revenue.

Looking ahead, sell-side analysts expect revenue to grow 5.3% over the next 12 months. While this projection indicates its newer products and services will spur better top-line performance, it is still below the sector average.

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Operating Margin

Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.

Builders FirstSource has been an efficient company over the last five years. It was one of the more profitable businesses in the industrials sector, boasting an average operating margin of 12.2%.

Analyzing the trend in its profitability, Builders FirstSource’s operating margin rose by 4 percentage points over the last five years, as its sales growth gave it operating leverage.

In Q4, Builders FirstSource generated an operating profit margin of 8%, down 3.9 percentage points year on year. Since Builders FirstSource’s operating margin decreased more than its gross margin, we can assume it was recently less efficient because expenses such as marketing, R&D, and administrative overhead increased.

Earnings Per Share

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Builders FirstSource’s EPS grew at an astounding 40.8% compounded annual growth rate over the last five years, higher than its 17.6% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

Diving into the nuances of Builders FirstSource’s earnings can give us a better understanding of its performance. As we mentioned earlier, Builders FirstSource’s operating margin declined this quarter but expanded by 4 percentage points over the last five years. Its share count also shrank by 1.6%, and these factors together are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For Builders FirstSource, its two-year annual EPS declines of 21.2% mark a reversal from its (seemingly) healthy five-year trend. We hope Builders FirstSource can return to earnings growth in the future.

In Q4, Builders FirstSource reported EPS at $2.31, down from $3.55 in the same quarter last year. Despite falling year on year, this print beat analysts’ estimates by 4%. Over the next 12 months, Wall Street expects Builders FirstSource’s full-year EPS of $11.53 to stay about the same.

Key Takeaways from Builders FirstSource’s Q4 Results

It was encouraging to see Builders FirstSource beat analysts’ EBITDA expectations this quarter. We were also happy its EPS outperformed Wall Street’s estimates. On the other hand, its full-year EBITDA guidance missed significantly and its Windows, doors & millwork revenue fell short of Wall Street’s estimates. Overall, this was a softer quarter. The stock traded down 5% to $137.43 immediately after reporting.

Builders FirstSource’s earnings report left more to be desired. Let’s look forward to see if this quarter has created an opportunity to buy the stock. The latest quarter does matter, but not nearly as much as longer-term fundamentals and valuation, when deciding if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free .