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Beacon Roofing Up on Record Revs, Earnings Miss

Zacks Equity Research

Shares of Beacon Roofing Supply, Inc. (BECN) gained 0.8% and closed at $37 after the company reported record revenues in the first quarter of fiscal 2014 (ended Sep 30, 2014) on Feb 7. However, adjusted earnings per share declined 18.9% year over year to 30 cents due to tough weather conditions, pricing pressure and lower gross margins. The results also fell short of the Zacks Consensus Estimate of 36 cents.

Including refinancing charges of 2 cents per share and termination benefit of 1 cent, Beacon Roofing reported earnings of 37 cents in the year-ago quarter. However, for the reported quarter, the company had no one-time items.

Operational Update

Total revenue increased 7.5% year over year to a record $552 million but missed the Zacks Consensus Estimate of $569 million. Organic sales improved 3.3% in the quarter. In existing markets, non-residential roofing product sales increased 6.6%, while residential roofing products sales rose 1.4%. Complementary product sales increased 1% year over year. The reported quarter also benefited from the positive impact of acquisitions.

Cost of goods sold increased 9.9% year over year to $425 million. Gross profit was $126 million, flat year over year. Gross margin contracted 170 basis points (bps) from the prior-year quarter to 23% due to increase in the net product cost of Residential Roofing sales and decline in selling price.

Operating expenses for the quarter rose 5.6% to $99.8 million. Operating income decreased 16% year over year to $27 million. Consequently, operating margin slid 140 bps to 4.9% from the year-ago quarter.

Financial Position

As of Dec 31, 2013, cash and cash equivalents totaled $56.4 million versus $34 million as of Dec 31, 2012. Total debt was $34 million as of Dec 31, 2013 against $78.6 million as of Dec 31, 2012. The debt-to-capitalization ratio declined significantly to 4.2% as of Dec 31, 2013, from 10% as of Dec 31, 2012.

Cash flow from operations was $54 million in the first quarter of fiscal 2014 ended Sep 30, 2014, up 14.5% from $47 million in the prior-year comparable period.

2014 Outlook

For the full year, Beacon Roofing expects earnings per share to be at the lower end of the current guidance range of $1.67 to $1.94. The company provided 2014 operating income guidance in the range of 6% to 8%.

Our Take

Beacon Roofing will benefit from its consistent focus on cost control. The company’s acquisition pipeline remains active and we expect the acquisitions to continue at an accelerated pace in the near term.

The company opened 4 branches in the quarter and is targeting to open 25 additional branches in 2014. These new branches should add 2%–3% organic growth for the year. For 2015 and beyond, Beacon Roofing is planning to open at least 20 branches per year.

Furthermore, the company recently announced a separate and additional increase in product prices to offset cost pressure on items such as insurance and benefits. The hike in price will range from 5% to 8% and will be effective from the beginning of Mar 2014.

Both residential and non-residential construction sectors are showing signs of improvement, which bode well for the company. The demand for re-roofing is also on the rise, thereby providing ample scope for Beacon to reap profits.

However, a difficult pricing environment will continue to weigh on gross margins.

Peabody, Massachusetts-based Beacon Roofing is one of the major distributors of residential and non-residential roofing materials as well as complementary building products in the U.S. and Canada, with more than 90% of sales coming from the U.S.

Beacon Roofing currently has a Zacks Rank #5 (Strong Sell). However, some better-ranked stocks in the same industry include Lumber Liquidators Holdings, Inc. (LL), The Home Depot, Inc. (HD) and USG Corporation (USG). All these have a Zacks Rank #2 (Buy).

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