BLDR Valens Credit Analysis – Robust cash flows and sizable expected cash build indicate credit markets and ratings agencies are overstating credit risk
November 9, 2017
- Credit markets are materially overstating credit risk with a cash bond YTW of 7.556%, relative to an Intrinsic YTW of 5.146% and Intrinsic CDS of 323bps. Similarly, Moody’s is materially overstating BLDR’s fundamental credit risk, viewing it as a highly speculative, high-yield B2 credit, six notches lower than Valens’ IG4 (Baa2) rating.
- Incentives Dictate Behavior™ analysis highlights that management’s compensation framework focuses them on all three value drivers, which should incentivize them to improve cash flows, but could also potentially lead to increased leverage. That said, management members are well aligned with shareholders for long-term value creation.
- BLDR is currently trading at a 14.6x UAFRS-based P/E, which is near historical averages. At these levels, the market is pricing in expectations for declines in UAFRS-based ROA, likely expecting the firm to be unable to sustain recent operational improvements, and face potential macroeconomic headwinds. As such, if the firm is able to just maintain profitability at current levels, equity upside would be warranted