The Earnings Update + A Note on World Oil

Builders First Source & LSB Industries Q126 Earnings + Where is the New US Oil Supply?

Introduction

This week a few companies we follow close reported earnings, and I want to take the time to walk through how we are thinking about the earnings of each firm. Before we get to this though I want to talk about a few “state of the market” type topics that I noticed these last few weeks.

The piece of news that got folks on X fired up and talking was an interview with Paul Tudor Jones. For those that do not know Jones is a multi-billionaire who made his money trading interest rates and currencies.

I am only speaking of Jones because it seems to be of interest to the general market participant that is interacting with me on X. The most compelling point Jones makes is not the note on S&P500 pricing – the fact is many people are calling for overvaluation and there is no more signal in Jones saying it than anyone else with a long-dated investment track record. At the same time, people like Steve Eisman say they have no issue with the market and think things are fine.

What I would point to in Jones talk is not his opinions on market valuation or Bitcoin being an inflationary hedge but rather his story of Bunker Hunt in 1976 and his front row seat to the entire debacle. Jones was a trader in the commodity pits at the time and did some trading on behalf of the Hunts. Hunt loaded up at $3.50 Silver and from 1976-1979 saw Silver prices run to $35 before buying 20M ounces more and watching prices spike to $50.

Jones notes that at this time Hunt was worth something like $11B and was 5-6x richer than the next closest person. After watching Silver pricing balloon it proceeds to fall from $50 to $10 in a matter of 8-9 weeks and Jones describes Bunker Hunt as “essentially bankrupt”. The part that drew my attention was Jones own personal conclusion and influence that came from this.

Jones says that having a front row seat to the Hunt Family wealth destruction influenced him against buy and hold and in favor of a trading framework. That is so curious to me. This then led Jones to be openly hostile and critical of Buffet who he claims was simply in the right place at the right time.

While Jones retracted some of his criticism in the interview I am certain that his aversion for value in favor of trading led to some serious behavioral biases – biases that in the same interview Jones admits openly. This leads us to the second interesting point that Jones makes – knowing where you have and edge and where you do not.

While I am not a particular fan of Jones, it is admirable that he points to his own emotional ineptitude at being a value-type investor which goes to show that being honest with yourself on what you are, and are not capable of doing is more important in some cases as what you are capable of.

Had Jones decided he was value through and through and fooled himself into sticking with the strategy it is likely he would not have had the level of success he had with his trading career.

The third and final point I would highlight from the interview was the note on Trends. Though Jones gives credence to Value as a strategy and admits the genius of Buffet’s understanding of compounding interest from a young age, Jones concludes that all success in markets comes from the same thing – riding the biggest trend for the longest time.

This I fundamentally disagree with. While we incorporate macro analysis in our framework for idea generation to get a sense of what industries might be advantaged in the next 7-10 years, the bottoms up approach to business valuation and investment is a widely successful and repeatable that is not a trend at all.

I struggle with Jones conclusion here and I think it is convenient as a trader to have that world view. With that said, the conversation was a hot topic this week and some interesting points were made that I felt were value add to highlight.

To wrap up on the interview our basic conclusions with the first being that extra vivid examples heavily influence decision making for much longer than I think the average person would assume. The second is knowing what you do not know is in some ways more important than what you do as self-delusion is part and parcel of the human condition. Finally, the idea that market narratives and trends drive outperformance in equities seems to me to be more a sign of the times comment rather than a well thought out bottoms up approach. Buffet did not outperform because he simply rode a trend, he did so because he made superior decisions and had better judgement.

Now, lets get to earnings & Oil.

Builders First Source

Builders First Source is a piece of our book and a business we think highly of. The companies position in its market, the quality of the management team and the macro backdrop in housing shortages is constructive for Builders over the 3–5-year view. Not only is Builders cheap in our estimation, but the business is in the process of a fundamental shift.

In the short term we think the recovery in new home building will be value add for the firm and this current lull is allowing the business to make value add M&A, buyback cheap stock, and take market share for the eventual recovery in the business. The longer term view that we think the market is fundamentally missing is the move to more offsite construction activity. Offsite construction is proven to be cheaper, more efficient in materials and energy and in time to dry-in.

Builders through its infrastructure in place has both the foot print to be a leader in offsite but also through its digital solutions and Paradigm which is a really interesting technology drive opportunity that presents a lot of value add for the home builders.

The final piece to Builders is the BMC acquisition was done in 2021 and real business change does take time. There are reasons for slower adoption for some of the offsite solutions that are structural to home building industry that remains heavily fragmented across regions but the Ready Frame solution, for example, is an incredible product that we believe is simply too good of an offering to be ignored in the long term as we battle housing affordability.

The Numbers

I am not going to copy and paste numbers off an earnings report – anyone can do this and it is not value add for you. My general take based on these figures are the business is operating in a tough macro environment but reported better numbers than I would have assumed.

It is hard for me to call these tough times when the business generated $43M of FCF and bought back $300M of stock. The balance sheet remains in tact though leverage ratios are elevated from a cyclically depressed period of profitability.

Builders sees a muted and declining starts environment which includes SFH starts down low single digits, MFH starts down low single digits and R&R down 1%. On top of this the company estimates $390-$410 mbf for lumber which we would note is roughly $100 cheaper than the break even price needed for profitability for the sawmill operators in North America.

The difference in the $875M in FCF last year vs $450M~ estimated for 2026 was the result of a working capital release that they were only able to do because of the muted outlook for home building in the back half of last year. The company is now in a period of building working capital as they are expecting to need it in 2H 2026 as an uptick in demand is expected.

We would note that the day before Builders reported the starts figure was up roughly 3% which was a welcome surprise for us. The timing of new starts to Builders involvement is roughly 3 months so there is some lag in starts numbers vs Builders bottom line impact.

The build in working capital shown above is inclusive of $116M of AR release plus another $66M of acquired AR from the Alpine and OC acquisitions on top of another $117M of inventory destock plus an additional $81M of inventory release picked up in acquisitions. In periods of lull the company will do this but is in the process of rebuilding working capital so that roughly $300M of capital release will turn into $180M of build for the 2H26 demand uptick vs the previous year.

All in all the earnings were fine, nothing to be alarmed about but it is clear the starts environment is in a tough spot. It is our belief that lower rates, higher rates, or anywhere in between really will not matter as new homes need built or affordability will remain an issue.

There is a hesitancy cited by many credible sources that people are reluctant to purchase a home because they are “waiting for prices to fall”. In other words, the public has been conditioned that 2-3% mortgage rates are the normal and are waiting for this to come back – unfortunately that is not going to happen.

LSB Industries