Better Earnings Needed Before Builders FirstSource, Inc. (NYSE:BLDR) Stock Gains Foothold

With a price-to-earnings ratio (or “P/E”) of 17.3x Builders FirstSource, Inc. (NYSE:BLDR) may be sending bullish signals right now, as nearly half of all companies in the United States have P/E ratios greater than 20x, and even P/E ratios greater than 36x are not uncommon. Still, we would have to dig a little deeper to determine whether there is a rational basis for the reduced P/E ratio.

Builders FirstSource could do better as its earnings have been declining recently while most other companies have seen positive earnings growth. It seems that many expect the weak earnings performance to continue, which has depressed the P/E ratio. If this is the case, existing shareholders will likely have difficulty getting excited about the future direction of the share price.

Check out our latest analysis for Builders FirstSource

If you want to see what analysts are predicting for the future, you should check out our free Report on Builders FirstSource.

Is there growth for Builders FirstSource?

To justify its P/E ratio, Builders FirstSource would need to deliver slow growth that lags the market.

If we look at the last year of earnings, disappointingly the company’s profit fell by 13%. However, some very strong previous years meant that the company was still able to grow earnings per share by an impressive 39% overall over the last three years. So we can start by confirming that the company has generally performed very well in terms of earnings growth during this period, although there have been some issues along the way.

Looking ahead, estimates from the company’s analysts suggest earnings growth will move into negative territory, declining by 2.5% next year. That’s not great when the rest of the market is expected to grow by 15%.

Given this information, we’re not surprised to see Builders FirstSource trading at a below-market P/E ratio. However, falling profits are unlikely to lead to a stable P/E ratio in the long term. Even maintaining these prices could be difficult as the weak outlook weighs on stocks.

The key takeaway

It is argued that the price-to-earnings ratio is a minor indicator of value in certain industries, but can be a powerful indicator of business sentiment.

We noted that Builders FirstSource is maintaining its low P/E ratio, as expected, given the weak forecast of declining earnings. At this point, investors believe that the potential for earnings improvement is not great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to act as a barrier to share price near these levels.

It is always necessary to consider the ever-present specter of investment risk. We have identified it 2 warning signs with Builders FirstSourceand understanding these should be part of your investment process.

You may find a better investment than Builders FirstSource. If you want a selection of possible candidates, check this out free List of interesting companies that trade on a low P/E ratio (but have proven they can grow profits).

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