Is Builders FirstSource, Inc. (NYSE:BLDR) Potentially Undervalued?

Today we're going to take a look at the well-established Builders FirstSource, Inc. (NYSE:BLDR). The company's stock received a lot of attention from a substantial price increase on the NYSE over the last few months. With many analysts covering the large-cap stock, we may expect any price-sensitive announcements have already been factored into the stock’s share price. However, what if the stock is still a bargain? Today I will analyse the most recent data on Builders FirstSource’s outlook and valuation to see if the opportunity still exists.

View our latest analysis for Builders FirstSource

What's The Opportunity In Builders FirstSource?

Good news, investors! Builders FirstSource is still a bargain right now according to my price multiple model, which compares the company's price-to-earnings ratio to the industry average. I’ve used the price-to-earnings ratio in this instance because there’s not enough visibility to forecast its cash flows. The stock’s ratio of 9.18x is currently well-below the industry average of 17.24x, meaning that it is trading at a cheaper price relative to its peers. Although, there may be another chance to buy again in the future. This is because Builders FirstSource’s beta (a measure of share price volatility) is high, meaning its price movements will be exaggerated relative to the rest of the market. If the market is bearish, the company’s shares will likely fall by more than the rest of the market, providing a prime buying opportunity.

Can we expect growth from Builders FirstSource?

Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. Buying a great company with a robust outlook at a cheap price is always a good investment, so let’s also take a look at the company's future expectations. However, with a negative profit growth of -19% expected over the next couple of years, near-term growth certainly doesn’t appear to be a driver for a buy decision for Builders FirstSource. This certainty tips the risk-return scale towards higher risk.

What This Means For You

Are you a shareholder? Although BLDR is currently trading below the industry PE ratio, the negative profit outlook does bring on some uncertainty, which equates to higher risk. Consider whether you want to increase your portfolio exposure to BLDR, or whether diversifying into another stock may be a better move for your total risk and return.

Are you a potential investor? If you’ve been keeping tabs on BLDR for some time, but hesitant on making the leap, I recommend you dig deeper into the stock. Given its current price multiple, now is a great time to make a decision. But keep in mind the risks that come with negative growth prospects in the future.

So while earnings quality is important, it's equally important to consider the risks facing Builders FirstSource at this point in time. Every company has risks, and we've spotted 3 warning signs for Builders FirstSource (of which 1 can't be ignored!) you should know about.

If you are no longer interested in Builders FirstSource, you can use our free platform to see our list of over 50 other stocks with a high growth potential.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.