Investors Holding Back On Builders FirstSource, Inc. (NASDAQ:BLDR)

Builders FirstSource, Inc.'s (NASDAQ:BLDR) price-to-earnings (or "P/E") ratio of 15.3x might make it look like a buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 18x and even P/E's above 37x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Builders FirstSource has been struggling lately as its earnings have declined faster than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

See our latest analysis for Builders FirstSource

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How Is Builders FirstSource's Growth Trending?

In order to justify its P/E ratio, Builders FirstSource would need to produce sluggish growth that's trailing the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 9.7%. Regardless, EPS has managed to lift by a handy 15% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to remain buoyant, climbing by 8.4% during the coming year according to the nine analysts following the company. That would be an excellent outcome when the market is expected to decline by 0.6%.

In light of this, it's quite peculiar that Builders FirstSource's P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the contrarian forecasts and have been accepting significantly lower selling prices.

The Final Word

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Builders FirstSource's analyst forecasts revealed that its superior earnings outlook against a shaky market isn't contributing to its P/E anywhere near as much as we would have predicted. When we see a superior earnings outlook with some actual growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. Perhaps there is some hesitation about the company's ability to keep swimming against the current of the broader market turmoil. So, the risk of a price drop looks to be subdued, but investors seem to think future earnings could see a lot of volatility.

Having said that, be aware Builders FirstSource is showing 3 warning signs in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on Builders FirstSource, explore our interactive list of high quality stocks to get an idea of what else is out there.

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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