Beacon Roofing to Benefit from Acquisitions, Risks Remain

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On Dec 7, we issued an updated research report on Beacon Roofing Supply, Inc.BECN . This distributor of roofing material in the U.S. and Canada is expected to benefit from acquisitions, growth in residential and non-residential building construction activity as well as sustained demand in re-roofing activity. However, instability in the oil market, volatile exchange rates, reduced capital expenditures, remain headwinds for the company.

Beacon Roofing reported record fourth-quarter fiscal 2015 earnings of 75 cents per share, a 56% increase year over year. Higher volume and gross margins, partially offset by increased operating expenses due to incremental costs associated with the acquisitions undertaken and the 32 greenfields opened in the last 24 months, led to the overall improvement.

For fiscal 2016, Beacon Roofing expects revenues in the range of $3.8 billion to $4 billion and earnings of around $1.80 per share. Gross margin is expected to be in the range of 23% to 24%, up from the previous range of 22.5% to 24% given the confidence in the improvement actions implemented over the last couple of years. For fiscal 2016, the company is evaluating potential markets, which fit its strategy of continued expansion, for greenfield openings. Beacon Roofing's branches have a unique marketing plan and mix of products designed to suit its local markets. The company believes that greenfields are strategically located within markets with strong dynamics and opportunity to rapidly establish its presence and gain local market share.

Beacon Roofing has expanded its business through strategic acquisitions and diversification of its product offering. In October, the company acquired Roofing Supply Group for approximately $1.1 billion which will help Beacon Roofing to expand its geographic footprint as well as provide better product diversification and customer service. Recently, Beacon Roofing also acquired quality exterior building materials distributor, RCI Roofing Supply. The acquisition will broaden its product offering giving it a stronger market presence in Omaha by combining RCI Roofing with its existing Roof Depot and new RSG branches. The company expects several deals to close in 2016.

As per the international business research company, The Freedonia Group, roofing demand in the U.S. is projected to grow 5% annually through 2019 to $21.4 billion. Through 2019, residential roofing construction in dollars is expected to grow at 6.9% annually, higher than the 3.6% growth projected for non-residential roofing demand (in dollars), as new residential construction is projected to continue to recover from the low levels experienced from the 2007-2009 recession and its aftermath. Given that Beacon Roofing is the second largest distributor of residential and non-residential roofing materials in the U.S., it is poised to benefit from this growth.

Traditionally, over 75% of expenditures in the United States roofing market are for re-roofing projects. As homes age, new and re-roof demand increases because homeowners are forced to replace or repair old, deteriorating roofs. Given that historically, 75−80% of Beacon roofing's revenues are related to re-roofing, it will benefit from this demand.

Furthermore, U.S. asphalt shingle volume has remained meaningfully below its long-term average of 135 million square feet since 2009, according to the Asphalt Roofing Manufacturers Association. The aging U.S. housing stock, combined with below average roofing shingle volumes, supports a favorable supply/demand dynamic in the residential repair and remodel market in the coming years.

However, Beacon Roofing expects capital expenditures to be less than 1% of sales which is well below its historical average of 1.2% of sales and last year's 1.5% of sales. The company recorded capital expenditures, excluding acquisitions, of $20.8 million in 2015 compared with $37.2 million in 2014. Reduction in capital expenditures will hurt the company's growth in the long term.

Moreover, Beacon Roofing's performance will be affected by unstable oil prices , volatile exchange rates, general market softness, uncertainty regarding weather conditions and competition from its peers.

Beacon Roofing currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks from the sector are Tile Shop Holdings, Inc. TTS , The Home Depot, Inc. HD and Tecnoglass Inc. TGLS . While Tile Shop Holdings and Tecnoglass sport a Zacks Rank #1 (Strong Buy), Home Depot carries a Zacks Rank #2 (Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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