Shareholders of TopBuild would probably like to forget the past six months even happened. The stock dropped 25.8% and now trades at $286.52. This might have investors contemplating their next move.
Is there a buying opportunity in TopBuild, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is TopBuild Not Exciting?
Despite the more favorable entry price, we're cautious about TopBuild. Here are three reasons why you should be careful with BLD and a stock we'd rather own.
1. Core Business Falling Behind as Demand Plateaus
Investors interested in Home Builders companies should track organic revenue in addition to reported revenue. This metric gives visibility into TopBuild’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, TopBuild failed to grow its organic revenue. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests TopBuild might have to lean into acquisitions to accelerate growth, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus). 
2. Revenue Projections Show Stormy Skies Ahead
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect TopBuild’s revenue to drop by 2.6%, a decrease from its 1.7% annualized growth for the past two years. This projection doesn't excite us and implies its products and services will see some demand headwinds.
3. Recent EPS Growth Below Our Standards
While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.
TopBuild’s EPS grew at an unimpressive 7.7% compounded annual growth rate over the last two years. On the bright side, this performance was higher than its 1.7% annualized revenue growth and tells us the company became more profitable on a per-share basis as it expanded.
Final Judgment
TopBuild isn’t a terrible business, but it isn’t one of our picks. Following the recent decline, the stock trades at 13.9× forward P/E (or $286.52 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better stocks to buy right now. Let us point you toward one of our all-time favorite software stocks.
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