Vulcan Materials Company (NYSE:VMC) shares are down more than -1.95% this year and recently decreased -1.21% or -$1.49 to settle at $121.22. Builders FirstSource, Inc. (NASDAQ:BLDR), on the other hand, is up 82.95% year to date as of 12/05/2017. It currently trades at $20.27 and has returned -1.13% during the past week.
Vulcan Materials Company (NYSE:VMC) and Builders FirstSource, Inc. (NASDAQ:BLDR) are the two most active stocks in the General Building Materials industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.
Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect VMC to grow earnings at a 17.80% annual rate over the next 5 years. Comparatively, BLDR is expected to grow at a 17.40% annual rate. All else equal, VMC’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this., compared to an EBITDA margin of 5.13% for Builders FirstSource, Inc. (BLDR). VMC’s ROI is 8.50% while BLDR has a ROI of 16.70%. The interpretation is that BLDR’s business generates a higher return on investment than VMC’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. VMC’s free cash flow (“FCF”) per share for the trailing twelve months was +1.00. Comparatively, BLDR’s free cash flow per share was +0.39. On a percent-of-sales basis, VMC’s free cash flow was 3.68% while BLDR converted 0.69% of its revenues into cash flow. This means that, for a given level of sales, VMC 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. VMC has a current ratio of 4.20 compared to 1.90 for BLDR. This means that VMC can more easily cover its most immediate liabilities over the next twelve months. VMC’s debt-to-equity ratio is 0.60 versus a D/E of 4.52 for BLDR. BLDR is therefore the more solvent of the two companies, and has lower financial risk.
VMC trades at a forward P/E of 29.33, a P/B of 3.47, and a P/S of 4.29, compared to a forward P/E of 14.23, a P/B of 5.48, and a P/S of 0.33 for BLDR. VMC is the cheaper of the two stocks on book value basis but is expensive in terms of P/E and P/S ratio. 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
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. VMC is currently priced at a -12.96% to its one-year price target of 139.27. Comparatively, BLDR is -3.48% relative to its price target of 21.00. This suggests that VMC is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 1.70 for VMC and 1.80 for BLDR, which implies that analysts are more bullish on the outlook for BLDR.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. VMC has a beta of 0.87 and BLDR’s beta is 2.15. VMC’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. VMC has a short ratio of 3.68 compared to a short interest of 3.22 for BLDR. This implies that the market is currently less bearish on the outlook for BLDR.
Vulcan Materials Company (NYSE:VMC) beats Builders FirstSource, Inc. (NASDAQ:BLDR) on a total of 10 of the 14 factors compared between the two stocks. VMC is growing fastly, is more profitable, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. VMC is more undervalued relative to its price target. Finally, CNC has better sentiment signals based on short interest.