Builders FirstSource's (BLDR) second quarter results were essentially in line with our estimates. Sales were $5 million above our forecast, while EPS missed by $0.01. The management declined to offer specific guidance, but does expect the difficult market conditions to negatively affect the company's operating results through 2009.
Meanwhile, BLDR continues to cut costs and gain market share. When industry conditions finally improve, the company will be positioned to ramp up its operations and deliver powerful operating leverage. That said, we believe the residential housing market is far from bottoming, and it is too early to recommend buying BLDR shares. We rate the stock a Hold rating with a $5 target price.
We are forecasting losses for the next several quarters. The company's sales are declining while its operating cost structure remains mostly fixed. This is causing negative operating leverage. We continue to believe that the company's 2008 EPS should turn out to be the trough earnings during this down cycle in housing.
The company's bull story is predicated on government intervention in housing, a fully discounted stock price, and being an eventual survivor coming out of this difficult cycle. The federal government already sent out $600 rebate checks to most Americans, and there is talk of additional stimulus packages down the road. We believe the housing industry's problems are well known, and that the most of the negatives are already discounted by the market.
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