Playing the U.S. Housing Recovery the Wrong Way: Builders FIrstSource & Credit 101

• Builders FirstSource ($BLDR), a materials and component supplier to the residential construction industry, recently acquired much larger competitor ProBuild
• Significant profitability risk from lumber price decline, failure to reduce OpEx/recognize merger synergies, lower than expected housing #’s, macro uncertainty
• Both firms are PE-sponsored levered rollups; acquisition is a levered rollup of levered rollups with BFS sponsors controlling ~40% at close
• Combined firm is levered to the hilt:
• Pro forma Long-term debt (ex-leases)/Adjusted LTM EBITDA stands at 7.1x, 34% higher than average for S&P LSTA Issuers as of 2015q2
• Adjusted EBITDA/Interest Expense is running at 1.9x versus 3.4x for LSTA Issuers, or 43% lower than average
• (Adjusted EBITDA-CapEx)/Interest Expense is 1.3x
• Our base-case projected 2015 adjusted EBITDA is $262mm
• Long-term Debt/Adj. EBITDA 7.4x
• Adj. EBITDA/Interest Expense 1.6x
• (Adj. EBITDA-CapEx)/Interest Expense 1.0x
• BLDR stock pricing in higher growth, less risk v. our projections. As of writing at $14.40:
• 13.1x EV/2015e Adj. EBITDA or 9.6x 2020e EBITDA
• 20.7x EV/(Adj. EBITDA-CapEx) or 15.1x 2020e EBITDA
• At 11x EBITDA, difference between $250mm and $350mm is $5.60/share v. $15.30; -61% downside v 7% upside