By Jack Hough
A few weeks ago I mentioned Builders FirstSource, the largest supplier of materials to home builders, whose shares had returned 2,900% over the past decade. "I actually had a fund mention that we were triggered in the algos with Nvidia because of the weird way we were moving in the stock," says the company's new CEO, Peter Jackson, who took over on Nov. 6 as part of a planned succession.
Jackson recently spoke with Barron's about his plans for growth, the state of the housing market, and the future of home-building. Edited excerpts of the discussion follow.
On what Builders FirstSource does:
We don't just provide your traditional lumber drop. Two by fours, two by sixes showing up at the job site when you need them. We do that. No question. But we also have about half of our business, which is what we call value add. You take technology, process, fixed overhead, and replace skilled labor on the job site.
An example of that would be roof trusses -- those triangles on the top of the house. It's an important load-bearing component. Historically, it's where a lot of folks would, candidly, over-engineer. They'd throw in a few more boards. In the modern era, we use computer software. We use custom-designed engineered plates to hold the connections together where the two pieces of board meet. That is done in a factory on equipment that has a fair amount of automation. The precision, the quality, can be better than on the job site. And then importantly, it's just a lot faster. It allows us to capture a nice margin while still providing a nice value for the builder.
On growth opportunities:
"We're probably about 20% of the market. So quite large, more than twice as big as our next biggest competitor, but in a market this fragmented, still a lot of opportunity to do deals and to grow. If you think about what we do on the value add side, we're not just capturing the [market] for materials, we're capturing it for labor, too. So there's a tremendously large opportunity.
About 15% of our business today is installed, where we're responsible for the hiring and input of everything from framing to windows to millwork to doors, all over the country. That is probably the fastest-growing part of our business right now. Builders would rather sell a house than build a house because building houses is a pain. If they can get someone to help them with the part that is a pain, that is good for them. And it's good for us.
On strained housing affordability and a shift to smaller houses:
We've seen that and it isn't just the size of the house. It's the complexity. Maybe it's got a slab on grade instead of a basement. Even up in the North, which is kind of surprising to me. I grew up in the North. [Everyone had] a basement. Apparently that is changing. Garages going from a three to a two to a one. In some cases, it's just bonus space that gets cut away. That shows up in our numbers. I think we're leveling out and lapping it. It's certainly something that we think will bounce back.
On MyBLDR.com:
We bought a company by the name of Paradigm in 2021, which had expertise in configuration software. They were very focused on window configuration, door configuration. If you walk into your favorite home improvement retailer, and you want to buy a window, you're going to sit down at a screen that will help you walk through the process. That core technology we recognized was something we could leverage for whole home configuration.
[We've] built out what we're now calling MyBLDR.com. It is a series of tools and functionalities and technologies that creates an end-to-end platform, right now focused on the 50 to 250 homes a year kind of a builder, to be more efficient, more effective, basically to leverage modern technology. We released it in February. We think it's going to be a real game changer, not just for us, but we think it has the potential to make home building more efficient, more affordable.
On the future of home-building:
McKinsey's got this study they put out and it has productivity improvement over the last 100 years. Home building is down there next to hunters and gatherers at the bottom of the chart. Nothing's changed. There have been waves of improvement over the years, like modularization. Off-site fabrication. You could go all the way back to Levittown in the New York area, what they thought the world was going to be like. In most cases, the cycle killed those guys. The density required, the distance to travel -- when you get into big bulk, you end up shipping a lot of air, which limits your distance that you can actually serve. It kills folks after a while.
We have a unique capability, and it is really evidenced by this whole truss manufacturing we were talking about earlier. We've got 125 truss plants around the country, and because we serve all the home builders, not one, we're able to leverage our capacity. I'm a manufacturing guy at heart. The game is: fill your capacity. When builders try to do it themselves, inevitably they'll put their factory in a great location for their existing communities. When they build out their communities and they move somewhere new, all of a sudden their plant becomes a trailing anchor. We don't have that.
I think that opens the door to more modularization, something that a lot of people have tried to take swings at over the years. Candidly it failed. You guys have probably heard of Katerra and the SoftBank guys. That was a particularly flaming mess by the end. But I think a bunch of the ideas they had were good. Leveraging technology, robotics, process improvement to be able to do more off the job site. If you combine that with our digital platform, you start to introduce this idea of third-party firms working in a precise and reliable environment. The walls, the roof trusses, the cabinets, the floors can all be selected, designed, built, and delivered. Over time, I think that is how you get to a modern...I don't know if I would ever say factory, because I don't think mobile homes or modular homes are really where we'll go at the end of the day. But you can do meaningfully bigger components of the house. That feels like the future and something we're leaning into.
Write to Jack Hough at jack.hough@barrons.com. Follow him on X and subscribe to his Barron's Streetwise podcast.
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November 21, 2024 03:00 ET (08:00 GMT)
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