We recently compiled a list of 8 Most Profitable Industrial Stocks to Invest In. In this article, we will look at where Builders FirstSource, Inc. (NYSE:BLDR) ranks among the most profitable industrial stocks.

Total US industrial net absorption in H1 2024 came in at 67.1 million square feet, reflecting a significant decline from the historic peak in absorption in 2021, when it was 749.3 million square feet for the year, as per historical data provided by CoStar. However, amidst the uncertainty regarding the economic outlook for H2 2024, the current NAIOP Industrial Space Demand Forecast expects that the national industrial real estate market should continue the trend of positive net absorption.

As per NAIOP, the Commercial Real Estate Development Association, total net absorption for H2 2024 is expected to be ~114 million square feet. The full-year absorption in 2025 is expected to be ~249 million square feet, and absorption in the first half of 2026 is forecast to be ~154 million square feet. With the expectation of lower rates moving forward, the potential for increased industrial leasing activity in H2 2024 and onward remains significant. With interest rates trending lower, businesses are expected to reaccelerate their capex plans that have slowed since 2022’s increase in rates.

Deal Activity in The Industrials and Services (I&S) Sector

PwC reported that the industrials and services (I&S) sector should see a steady pace of deal activity moving forward. Despite the market challenges, such as elevated interest rates and regulatory concerns, both buyers and sellers are resorting to the M&A market in a bid to drive further growth and value creation. As per PwC, in the current environment, companies continue to evaluate portfolio performance to determine whether or not they should divest non-core assets to finance strategic and corporate investments.

Deal activity in Aerospace & Defence should accelerate in H2 2024 and 2025. M&A is expected to focus on small to midsize acquisitions instead of larger deals, with companies seeking to address strategic and labour talent gaps and secure supply chains and production capacity via vertical integration. The commercial aerospace sector should continue to grow in H2 2024. PwC expects continued activity in the aircraft aftermarket segment, courtesy of aging military and commercial fleets.

Next, deal activity in the industrial manufacturing sector should accelerate in the near to medium term. This is expected to be driven by increased investor optimism about the industry and stability in the broader macroeconomic environment. Decarbonization and other environmental considerations are expected to remain the focus areas. PwC mentioned that there is a strong interest in manufacturing processes pivoting from metals to more sustainable raw materials.

For Industrial Decarbonization, International Cooperation Is a Must

As per the World Resources Institute, the industrial sector makes up for more than a quarter of total global GHG emissions, with cement and steel production making up for most of the part. In the US, the federal government announced a $6.3 billion investment, which is focused on low-emission industrial demonstration projects. The selection has been done across industrial subsectors, such as decarbonizing cement and steel plants. Also, the European Council signed off on new regulations in a bid to reduce emissions and accelerate efficiencies in industry.

World Resources Institute believes that international collaboration remains a key in achieving climate goals in heavy industries. This is because industrial products are traded throughout borders to cater to global value chains. Shared innovation and learning remain important when it comes to accelerating the deployment of decarbonization technologies.

Our Methodology

To list the 8 Most Profitable Industrial Stocks to Invest In, we used a Finviz screener to screen for stocks from the industrial sector. After getting the list of 30-40 stocks, we narrowed our list by choosing the ones having positive net income on a TTM basis and a 5-year net income CAGR. Finally, the following 8 most profitable industrial stocks were ranked in ascending order of their hedge fund sentiments, as of Q2 2024.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

Builders FirstSource, Inc. (NYSE:BLDR)

Net Income on TTM Basis: $1.405. billion

5-Year Net Income CAGR: 43.91%

Number of Hedge Fund Holders: 59

Builders FirstSource, Inc. (NYSE:BLDR) manufactures and supplies building materials, manufactured components, and construction services to professional homebuilders, sub-contractors, and consumers in the US.

Wall Street analysts believe that Builders FirstSource, Inc. (NYSE:BLDR)’s key strength lies in the robust balance sheet, that offers significant financial flexibility. As of March 31, 2024, it reported a low net leverage of 1.1x, placing it well for potential strategic moves. The company has a strong potential for significant capital deployment, which includes share buybacks and M&As.

The fragmented nature of the market offers significant opportunities for consolidation, and Builders FirstSource, Inc. (NYSE:BLDR)’s healthy financial position should enable it to capitalize on such prospects. Therefore, a strong market position, the ability for effective capital deployment, and diverse product and service offerings are expected to provide long-term revenue growth opportunities. The company completed 3 acquisitions and initiated a new $1 billion share repurchase plan.

In June, it acquired RPM Wood Products, which improves its ability to serve high-end custom builders in Northeast Florida. Builders FirstSource, Inc. (NYSE:BLDR) targets $1 billion in incremental sales by 2026 via its digital platform and it plans to focus on profitable market share growth and efficiency. The company expects a rebound in the multi-family sector in 2025.

Loop Capital increased its target price on the shares of Builders FirstSource, Inc. (NYSE:BLDR) from $190.00 to $230.00, giving a “Buy” rating on 20^th September. Black Bear Value Partners, an investment management firm, released its Q3 2024 investor letter. Here is what the fund said:

“Builders FirstSource, Inc. (NYSE:BLDR) is a manufacturer and supplier of building materials with a focus on residential construction. Historically this business was cyclical with minimal pricing power as the primary products sold were lumber and other non-value-add housing materials. Since the GFC, BLDR has focused on growing their value-add business that is now 50%+ of the topline. The company has modest leverage and has been using their abundant free-cash-flow to buy in over 41% of the stock in the last ~3 years.

While mortgage rates are higher, they are not unusual versus history. The low rates of the last 5-10 years are the outlier. We have a structural shortage of housing in the USA. With existing homeowners locked into low-rate mortgages, the aspiring homeowner may increasingly need to find a home from a homebuilder.

Normalized free cash flow per share looks to be in the range of $13-$16 per year. Margins are structurally higher given their increased shift into value-add products. At quarter end pricing of ~$194 that implies a free-cash-flow yield of 7-8% which does not reflect the long-term housing needs or their pricing power.”

Overall BLDR ranks 1st on our list of the most profitable industrial stocks to invest in. While we acknowledge the potential of BLDR as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued AI stock that is more promising than BLDR but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article was originally published on Insider Monkey.