We have downgraded our recommendation on
Beacon Roofing Supply, Inc
) from Outperform to Neutral. Beacon Roofing currently maintains
a Zacks #3 Rank (Hold) over the short term.
Beacon Roofing's fourth-quarter 2012 earnings came in at 60
cents per share, in line with the Zacks Consensus Estimate.
Earnings increased 7% annually, attributable to higher sales on
the back of accretive acquisitions and gross margin expansion;
offset by higher operating expenses. Revenues increased 4% to
$598 million, falling short of the Zacks Consensus Estimate.
In fiscal 2012, adjusted EPS surged 44% year over year to
$1.67, helped by higher sales and gross margins, somewhat offset
by higher operating expenses and a higher income tax provision.
EPS was in line with the Zacks Consensus Estimate. Total revenue
increased 12% year over year to $2.04 million, in line with the
Zacks Consensus Estimate.
The company primarily benefited from increased re-roofing
activities in the first half of fiscal 2012. Traditionally, over
70% of expenditures in the roofing market are for re-roofing
projects. Re-roofing projects are generally considered
maintenance and repair expenditures and are less likely to be
postponed during periods of recession or slow economic growth
compared to new construction projects. Driving the demand for
re-roofing is an aging U.S. housing stock. Over 60% of the U.S.
housing stock was built prior to 1980, with the median age of
U.S. homes is over 35 years. Furthermore; weather damage
homeowners looking to upgrade their homes, and sales of existing
homes are also driving demand.
U.S. residential construction is finally stabilizing and is on
the road to a much-awaited recovery, which bodes well for the
Beacon Roofing. Housing starts have improved throughout 2012 with
both housing starts and building permits attaining a 4-year high
Non-residential construction is also showing signs of
improvement. According to the American Institute of Architects,
after languishing in the negative territory for five consecutive
months, the architecture billing index (ABI) climbed back into
the positive territory with a score of 50.2 in August, improving
further to 51.6 in September and 52.8 in October. This is the
strongest pace of growth witnessed since December 2010. ABI is an
economic indicator that provides an approximate nine- to
twelve-month glimpse into the future of non-residential
construction spending activity and any score above 50 indicates
an increase in billings. As per the American Institute of
Architects, spending for non-residential construction will go up
to 4.4% in calendar 2012 and accelerate further to 6.2% in
Acquisitions are an important part of Beacon Roofing's growth
strategy. Over the last 10 years, the company has grown through a
combination of 22 strategic and complementary acquisitions
between fiscal 2002 and 2012, opening new branch locations,
acquiring branches and broadening its product offering. Sales
have grown at a 10-year compound annual growth rate of 14.0%. The
company's internal growth, which includes growth from existing
and newly opened branches but excludes growth from acquired
branches, has averaged 4.7% annually over the same
The company has recently acquired Structural Materials Company
in Southern California, Contractors Roofing & Supply Co. in
St. Louis and Pennsylvania-based McClure-Johnston Company. Its
main acquisition strategy is to target market leaders in
geographic areas where it does not have a presence. Beacon
Roofing also acquires companies to supplement branch openings
within existing markets. Beacon Roofing remains fairly active on
the acquisition front and we expect the acquisitions to continue
at an accelerated pace in the near term.
However, this acquisition driven growth strategy exposes the
company to acquisition related risks. Management may have trouble
finding suitable acquisition candidates that provide synergies in
existing markets and upfront earnings accretion.
Furthermore, a longer-than-expected downturn in residential
and non-residential roofing markets will affect results of Beacon
Roofing. Inability of Beacon Roofing to successfully pass on
higher raw material costs to customers will also have a negative
impact on its results.
Beacon is one of the three largest roofing material
distributors in the United States and Canada, with more than 90%
of sales coming from the U.S.
Lumber Liquidators Holdings, Inc.
) is Zacks #1 Rank (Strong Buy) stock in the same industry.
BEACON ROOFING (BECN): Free Stock Analysis
LUMBER LIQUIDAT (LL): Free Stock Analysis
To read this article on Zacks.com click here.