Builders FirstSource: What Credit Suisse Is Saying

• Builders FirstSource, Inc. BLDR shares have jumped 110 percent since April, when they hit a low of $6.84.
• Credit Suisse’s Michael Dahl initiated coverage of the company with a Neutral rating and a price target of $14.
• The company’s growth is dependent on its ability to realize the targeted synergies to grow EBITDA and reduce leverage, Dahl stated.

Analyst Michael Dahl pointed out that the ProBuild acquisition has transformed Builders FirstSource from “a $1.6 bln building products supplier focused on the Southern U.S. into the largest national supplier in the pro dealer market, with $6.1 bln in sales (FY14A pro forma) and 444 locations in 74 of the top 100 MSAs.”

The synergies from the acquisition are expected to boost Builders FirstSource’s earnings growth in the near future. Dahl added that the company is also poised to benefit from continued recovery in the housing segment.

Dahl expects modest acceleration in new construction and improving R&R to boost the company’s pro forma sales. This, coupled with annual synergies from the acquisition, will lift the merged entity’s EBITDA margins from 4.4 percent in 2014 to 7.3 percent in 2017.

Builders FirstSource’s growth prospects are offset by its highest financial leverage in the building products segment, the Credit Suisse report stated, while adding that the interest burden constrains flexibility.

The company is not expected to have excess free cash flows in the first year after the acquisition; therefore significant deleveraging is unlikely before 2H16, Dahl said.