Beacon Roofing To Grow Through Acquisitions, Risks Linger

On Jun 24, 2016, we issued an updated research report on Beacon Roofing Supply, Inc. (NASDAQ:BECN) . This distributor of roofing material in the U.S. and Canada has seen its estimates move north, ahead of its Q3 fiscal 2016 earnings release. The company has a positive record of earnings surprises in recent quarters.

Beacon Roofing delivered a record fiscal first-half performance that has set a strong pace for the rest of the year. Through the rest of the year, the company will continue to focus on sales growth, gross margin stability and improving operating leverage. It expects revenues in the range of $4.1–$4.2 billion and adjusted EPS within $2.00 and $2.10.

Beacon Roofing continues to expand its business through strategic acquisitions and diversification of its product offering. Recently, the company announced the acquisition of Fox Brothers Company, which sells complementary and residential roofing products. This acquisition renders better presence in the central and southern Michigan area with a future scope for expansion. Also, the buyout of Woodfeathers will help Beacon Roofing in the expansion of its capacity in the key Pacific Northwest market.

Moreover, over 75% of expenditures in the United States roofing market are traditionally for re-roofing projects, with the balance going to new construction. Net sales from re-roofing are expected to increase as the median age of owner occupied housing has increased from 23 years in 1985 to 38 years in 2013, according to U.S. Census data. In addition, 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. Growth is expected to be driven by both residential and non-residential building construction activities. Increase in roofing and re-roofing demand will help support Beacon Roofing’s revenues.

On the flipside, for fiscal 2016, the company expects capital expenditures to be less than 1% of sales, which is well below its historical average of 1.2% of sales and last fiscal’s 1.5% of sales. Reduction in capital expenditures will hurt Beacon Roofing’s growth in the long term.

Lower oil prices could affect roofing manufacturers’ pricing (both asphalt shingles and non-residential roofing). This will subsequently affect Beacon Roofing’s pricing and hurt the company’s margins.

Beacon Roofing currently carries a Zacks Rank #3 (Hold).

Key Picks from the Sector

Some better-ranked stocks in the same industry include BMC Stock Holdings, Inc. (NASDAQ:BMCH) , The Home Depot, Inc. (NYSE:HD) and Lowe's Companies, Inc. (NYSE:LOW) . While BMC Stock Holdings sports a Zacks Rank #1 (Strong Buy), Home Depot and Lowe's Companies carry a Zacks Rank #2 (Buy).

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