NEW YORK (TheStreet) -- Shares of Builders FirstSource (BLDR - Get Report) were gaining 13.7% to $13.15 on heavy volume, hitting a 52-week high of $13.37, on Tuesday following the building materials company's announcement that it will acquire privately-held lumber supplier ProBuild.
About 2.8 million shares of Builders FirstSource were traded by 9:48 a.m. today, above the company's average trading volume of about 481,000 shares a day.
On Monday, Builders FirstSource said it will pay $1.63 billion in cash to acquire ProBuild. The acquisition is expected to close sometime in the second half of 2015.
Builders FirstSource said it expects the acquisition to be immediately accretive to its earnings. ProBuild brought in $4.5 billion in revenue in 2014.
"We are very pleased to announce this compelling combination with ProBuild to create a more diversified company with enhanced scale and an improved geographic footprint that will drive significant value for our customers and stockholders," Builders FirstSource CEO Floyd Sherman said in a statement. "As the U.S. housing market continues its recovery, we believe now is the ideal time to position Builders FirstSource for its next phase of growth and value creation."
Insight from TheStreet's Insight Team:
Builders FirstSource is a part of David Peltier's Stocks Under $10 Portfolio. Here is what Dave had to say about the stock in a recent alert:
Builders FirstSource (BLDR:Nasdaq) is trading 57% higher today, changing hands around $10.80, after the company announced it is buying privately held building materials supplier ProBuild, for $1.63 billion.
After you receive this Alert, we will sell 700 shares of Builders FirstSource. This trade leaves us with 800 shares of the company, or 4.70% of the model portfolio. We are also lowering our rating on the stock to Two from One, and raising our price target to $13.
As the action in the stock suggests, this is a transformational deal for Builders FirstSource. The company is leveraging up its balance sheet to pay all cash in the transaction. ProBuild had $4.5 billion of revenue in 2014, compared with $1.6 billion for Builders FirstSource. ProBuild also has locations in 40 states, which will help the company expand beyond the southeastern region.
Management expects the deal to close in the second half of the year and be immediately accretive to earnings. Builders FirstSource is targeting $100 million to $120 million of potential cost synergies to be realized within two years.
We believe the acquisition should improve its buying power in the fragmented building products industry. While we don't want to be greedy with our gains today, we think the stock can ultimately move up toward the low- teens.
Separately, TheStreet Ratings team rates BUILDERS FIRSTSOURCE as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:
"We rate BUILDERS FIRSTSOURCE (BLDR) a HOLD. The primary factors that have impacted our rating are mixed some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its revenue growth and notable return on equity. However, as a counter to these strengths, we also find weaknesses including a generally disappointing performance in the stock itself, unimpressive growth in net income and generally higher debt management risk."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- BLDR's revenue growth has slightly outpaced the industry average of 2.6%. Since the same quarter one year prior, revenues slightly increased by 7.5%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
- BUILDERS FIRSTSOURCE has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, BUILDERS FIRSTSOURCE turned its bottom line around by earning $0.15 versus -$0.44 in the prior year. This year, the market expects an improvement in earnings ($0.36 versus $0.15).
- The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Building Products industry. The net income has significantly decreased by 46.5% when compared to the same quarter one year ago, falling from $4.53 million to $2.42 million.
- Although BLDR's debt-to-equity ratio of 9.55 is very high, it is currently less than that of the industry average. Along with the unfavorable debt-to-equity ratio, BLDR maintains a poor quick ratio of 0.96, which illustrates the inability to avoid short-term cash problems.
- You can view the full analysis from the report here: BLDR Ratings Report