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Beacon Roofing Down 9% Over a Year: What's Hurting the Stock?

Zacks Equity Research

Despite benefiting from solid integration of Allied Building Products and successful execution of technology initiatives, Beacon Roofing Supply, Inc.’s BECN shares fell more than 9% over a year compared with the industry and S&P 500 composite’s 7.4% and 3.1% growth, respectively.

The largest distributor of residential and non-residential roofing materials has been witnessing lower storm-related demand over a year. Weather-related woes, higher raw material prices and competitive pricing pressures further added to the concerns.

Earnings estimates for the fourth quarter and fiscal 2019 have moved 10.1% and 14.8% downward over the past two months, depicting analysts’ concern surrounding growth prospects. The innate weakness of Beacon Roofing is further ascertained by its Zacks Rank #5 (Strong Sell).

Let us find out more about the factors impacting Beacon Roofing’s results over the last few quarters.

Lower Demand: In the past nine months, Beacon Roofing’s existing market net sales grew just 0.9% due to lower storm-related demand in Southwest, Midwest and West markets, along with heavy rainfall in 2019 across most regions served.

Moreover, the company remains conservative regarding hail-related demand, post strong 2018 results. It anticipates weakness in the rest of fiscal 2019 due to persistent soft demand during the peak season of June and July months. Resultantly, net sales are now projected within $7.1-$7.2 billion, narrower than the earlier projection of $7-$7.35 billion.

Higher Raw Material Costs & Pricing Pressure: Raw material prices are increasing across a wide range of key items including asphalt, steel and gypsum, as well as for inbound flatbed rates and outbound costs including diesel and other delivery expenses.

Being a distributor of residential roofing supplies, Beacon Roofing is sensitive to highly volatile asphalt prices. This is because oil is a significant input in asphalt production. Consequently, shingle prices remain unstable. During the first nine months of fiscal 2019, cost of goods sold (as a percentage of net sales) grew 10 basis points (bps) year over year, resulting in 10 bps fall in gross margin.

Notably, the commercial roofing market has been experiencing heightened competitive pricing pressures. The maintenance, repair & operations (“MRO”) supply market is highly fragmented, with many smaller local players competing directly on price. Thus, hiked raw material prices and intense competition might hurt demand for these products, resulting in lower sales volumes.

Extreme Weather Conditions: As Beacon Roofing’s majority of work is performed outdoors, inclement weather conditions continue impacting financial results. The company’s earnings during the winter months are the most fragile, as extended periods of adverse weather impact the same.

In the fiscal second and third quarters, the company recorded lower profits due to the above-mentioned headwinds. Thus, it has lowered its fiscal 2019 adjusted EBITDA guidance to $490-$510 from $540-$610 million expected earlier.

Dismal Earnings Trend & Bleak View: During the first nine months of fiscal 2019, Beacon Roofing’s adjusted earnings of $1.21 per share decreased 25.3% on a year-over-year basis due to higher raw material and operating costs. On a further discouraging note, its earnings lagged the Zacks Consensus Estimate in six of the trailing nine quarters. Gross margin contracted 10 bps to 24.5% during the said period. Operating expenses increased 100 bps. Adjusted EBITDA margin declined 80 bps year over year.

Meanwhile, the company projects adjusted EPS in the range of $2.30-$2.50 compared with the prior guidance of $2.90-$3.35. The Zacks Consensus Estimate for earnings for the current year is pegged at $2.48 per share, indicating a decline from the year-ago figure of $2.70.

Key Picks

Some better-ranked stocks in the same space include BMC Stock Holdings, Inc. BMCH, Builders FirstSource, Inc. BLDR and GMS Inc. GMS. While BMC Stock sports a Zacks Rank #1 (Strong Buy), Builders FirstSource and GMS carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

BMC Stock and Builders FirstSource reported better-than-expected earnings in the trailing four quarters, with the average being 28.8% and 26.6%, respectively.

GMS’ earnings for the current year are expected to grow 10.8% year over year.

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