Earnings

Critical Comparison: Vulcan Materials Company (VMC) vs. Builders FirstSource, Inc. (BLDR)

Vulcan Materials Company (NYSE:VMC) and Builders FirstSource, Inc. (NASDAQ:BLDR) are the two most active stocks in the General Building Materials industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.

Growth

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect VMC to grow earnings at a 19.35% annual rate over the next 5 years. Comparatively, BLDR is expected to grow at a 19.77% annual rate. All else equal, BLDR’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns



A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this. Vulcan Materials Company (VMC) has an EBITDA margin of 26.1%, compared to an EBITDA margin of 4.85% for Builders FirstSource, Inc. (BLDR). This suggests that VMC underlying business is more profitable. VMC’s ROI is 8.50% while BLDR has a ROI of 16.70%. The interpretation is that BLDR’s business generates a higher return on investment than VMC’s.

Cash Flow 

Cash is king when it comes to investing. VMC’s free cash flow (“FCF”) per share for the trailing twelve months was -0.96. Comparatively, BLDR’s free cash flow per share was +0.39. On a percent-of-sales basis, VMC’s free cash flow was -3.53% while BLDR converted 0.69% of its revenues into cash flow. This means that, for a given level of sales, BLDR is able to generate more free cash flow for investors.




Liquidity and Financial Risk

Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. VMC has a current ratio of 2.40 compared to 1.80 for BLDR. This means that VMC can more easily cover its most immediate liabilities over the next twelve months. VMC’s debt-to-equity ratio is 0.72 versus a D/E of 5.27 for BLDR. BLDR is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

VMC trades at a forward P/E of 23.61, a P/B of 3.31, and a P/S of 4.17, compared to a forward P/E of 11.32, a P/B of 5.06, and a P/S of 0.28 for BLDR. VMC is the cheaper of the two stocks on book value basis but is expensive in terms of P/E and P/S ratio. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. VMC is currently priced at a -19.96% to its one-year price target of $143.91. Comparatively, BLDR is -13.21% relative to its price target of $19.00. This suggests that VMC is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 1.60 for VMC and 1.80 for BLDR, which implies that analysts are more bullish on the outlook for BLDR.

Risk and Volatility

Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. VMC has a beta of 0.87 and BLDR’s beta is 2.09. VMC’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. VMC has a short ratio of 2.30 compared to a short interest of 8.97 for BLDR. This implies that the market is currently less bearish on the outlook for VMC.

Summary

Vulcan Materials Company (NYSE:VMC) beats Builders FirstSource, Inc. (NASDAQ:BLDR) on a total of 8 of the 14 factors compared between the two stocks. VMC is more profitable, higher liquidity and has lower financial risk. VMC is more undervalued relative to its price target. Finally, VMC has better sentiment signals based on short interest.

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