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Beacon Roofing to Rise on Inorganic Growth; Risks Remain - Analyst Blog

On May 14, 2014, 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, greenfield branch openings and organic growth. Improving pricing and reducing product costs will also aid growth. However, instability in the oil market, volatile exchange rates and heightened competition, remain headwinds for the company.

Beacon Roofing has expanded its business through strategic acquisitions and diversification of its product offering. The company acquired Wholesale Roofing Supply (WRS) in Oct 2014. Beacon Roofing also acquired Applicators Sales & Service (Applicators) to strengthen its presence in northern New England. The company's acquisition of All Weather Products Ltd. (AWP) along with its three branches, in Aug 2014, will help to expand in Vancouver, thereby facilitating growth through geographical expansion. These acquisitions will aid in long-term growth.

Beacon Roofing plans to continue with its greenfield investment strategy. The company exceeded its internal goal of opening 20 to 25 branches and opened 26 in fiscal 2014. In 2015 and beyond, the company is planning to open at least 20 branches per year. In 2015, the company intends to open approximately 10 branches and has already announced five year-to-date.

Notably, Beacon Roofing's branches have a unique marketing plan and mix of products based on 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 guided sales growth in the range of 6% to 8% for 2015. The company remains focused on maximizing earnings for the year by executing the fundamentals of business plan, focusing on excellent customer service, sales growth and cost control. Further, Beacon Roofing announced price increases of most product lines based on price hikes by manufacturers earlier in second-quarter 2015. The price increases will come in effect in the month of May. Beacon Roofing has maintained its expectations for gross margins in the range of 22.5% to 24% taking improving system pricing and reducing product costs into consideration.

However, Beacon Roofing expects capital expenditures to be much lower at less than 1% of sales for 2015. The company recorded capital expenditures, excluding acquisitions, of $5.4 million in the second quarter of 2015, declining from $11.8 million in the prior-year quarter. In 2014, the company made significant investments in fleet and greenfields as well as in replacing existing equipment. 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).

Key Picks from the Sector

Better-ranked stocks in the sector include Tractor Supply Company TSCO , Tecnoglass Inc. TGLS and Tempur Sealy International Inc. TPX . All these stocks carry a Zacks Rank #2 (Buy).

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TRACTOR SUPPLY (TSCO): Free Stock Analysis Report

BEACON ROOFING (BECN): Free Stock Analysis Report

TEMPUR SEALY (TPX): Free Stock Analysis Report

TECNOGLASS INC (TGLS): Free Stock Analysis Report

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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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