Jordan Terry
October 14, 2015
Jordan Terry @ Stone Street Advisors LLC
Founder & Managing Director, Stone Street Advisors LLC, investment research & consulting

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

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

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