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Beacon Roofing Affected by Slow Growth in the Homebuilding Sector

Zacks Equity Research

On Jul 10, 2014, we issued an updated research report on Beacon Roofing Supply, Inc. (BECN). The roofing material distributor will continue to benefit from its greenfield investment strategy and balance sheet strength, while conservative outlook and pricing pressure remain areas of concern.

Notably, Beacon Roofing opened 4 new greenfields in the second quarter of fiscal 2014, which brings the count to 8 for the year and 17 since last year. The company aims to open 25 additional branches through rest of the year. These new branches should add 2%–3% to organic growth for the year. For 2015 and beyond, Beacon Roofing is planning to open at least 20 branches per year. With growth in core industry trends, we expect the greenfield openings to continue at an accelerated pace in the near term.

Beacon Roofing’s growth strategy is also likely to benefit from its strong balance sheet position which is evident from its strong metrics. The company reported cash and cash equivalents of $34 million as of Mar 31, 2014, up from $16.7 million as of Mar 31, 2013. Total leverage ratio was at 1.59x at the end of second quarter compared with 1.62x at the year-ago comparable period. The debt-to-capitalization ratio remains low at 4.5% as of Mar 31, 2014. In addition, interest coverage ratio of Beacon Roofing was 16.2x at the end of second quarter compared with 15.07x at the end of last year.

Despite these positives, Beacon Roofing expects earnings per share to be at the lower end of the current guidance range of $1.50 to $1.80. Beacon Roofing has expanded its business through strategic acquisitions and diversification of its product offering. However, over the last 18 months the company has been inactive on the acquisition front. This puts the company’s strategy of growing though acquisitions at risk.

Further, One of Beacon Roofing’s suppliers, Owens Corning, recently announced that roofing volumes for the first half of 2014 will be 20%, lower than the year-ago level because of slow growth in the homebuilding sector. This may affect Beacon Roofing’s profitability in the near term. In addition, general market softness and pricing pressure remain areas of concern going forward.

Additionally, increase in competition, general market softness, lack of strategic acquisitions and pricing pressure remain matters of concern going forward.

Beacon Roofing currently carries a Zacks Rank #4 (Sell).

Other Stocks to Consider

Some better-ranked stocks in the same industry include Fastenal Company (FAST), Aaron's, Inc. (AAN) and Advance Auto Parts Inc. (AAP). All of these stocks have a Zacks Rank #2 (Buy).

Read the Full Research Report on FAST
Read the Full Research Report on AAN
Read the Full Research Report on AAP
Read the Full Research Report on BECN

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