Earnings

A Side-by-side Analysis of Real Goods Solar, Inc. (RGSE) and Builders FirstSource, Inc. (BLDR)

Real Goods Solar, Inc. (NASDAQ:RGSE) shares are down more than -15.54% this year and recently decreased -0.79% or -$0.01 to settle at $1.25. Builders FirstSource, Inc. (NASDAQ:BLDR), on the other hand, is up 3.07% year to date as of 01/10/2018. It currently trades at $22.46 and has returned 0.49% during the past week.

Real Goods Solar, Inc. (NASDAQ:RGSE) and Builders FirstSource, Inc. (NASDAQ:BLDR) are the two most active stocks in the General Building Materials industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.

Growth

The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Comparatively, BLDR is expected to grow at a 15.98% annual rate. All else equal, BLDR’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. EBITDA margin of 5.13% for Builders FirstSource, Inc. (BLDR). RGSE’s ROI is -200.10% while BLDR has a ROI of 16.70%. The interpretation is that BLDR’s business generates a higher return on investment than RGSE’s.

Cash Flow 




The value of a stock is simply the present value of its future free cash flows. RGSE’s free cash flow (“FCF”) per share for the trailing twelve months was -0.67. Comparatively, BLDR’s free cash flow per share was +0.39. On a percent-of-sales basis, RGSE’s free cash flow was -0.04% 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 measure a company’s ability to meet short-term obligations and longer-term debts. RGSE has a current ratio of 2.30 compared to 1.90 for BLDR. This means that RGSE can more easily cover its most immediate liabilities over the next twelve months. RGSE’s debt-to-equity ratio is 0.00 versus a D/E of 4.52 for BLDR. BLDR is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

RGSE trades at a P/B of 0.98, and a P/S of 0.62, compared to a forward P/E of 14.85, a P/B of 6.14, and a P/S of 0.37 for BLDR. 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

Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. RGSE is currently priced at a -98.43% to its one-year price target of 79.80. Comparatively, BLDR is 0.58% relative to its price target of 22.33. This suggests that RGSE is the better investment over the next year.

Risk and Volatility

Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. RGSE has a beta of 2.20 and BLDR’s beta is 2.16. BLDR’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. RGSE has a short ratio of 0.76 compared to a short interest of 3.39 for BLDR. This implies that the market is currently less bearish on the outlook for RGSE.

Summary

Builders FirstSource, Inc. (NASDAQ:BLDR) beats Real Goods Solar, Inc. (NASDAQ:RGSE) on a total of 7 of the 14 factors compared between the two stocks. BLDR higher liquidity, is more profitable, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. Finally, NEM has better sentiment signals based on short interest.

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