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Loss at Beacon Roofing

Zacks Equity Research

Beacon Roofing Supply, Inc. (BECN) reported second-quarter 2013 adjusted loss per share of 2 cents, compared with earnings per share of 7 cents earned in the year-ago quarter, falling short of the Zacks Consensus Estimate of $0.00 per share or break even result.

The quarter results were affected by tough weather conditions in many of Beacons’ markets and higher operating expenses, partially offset by the impact from higher gross profit and lower interest expense.

The adjusted loss for the second quarter came after consideration of the $1.3 million credit to interest expense (or $0.8 million net of taxes) resulting from adjustments in the fair values of certain interest rate derivatives. Without this the second quarter loss per share was 0 cents compared to income per share of 7 cents in 2012.

Operational Update

Total revenue increased 5% year over year to $416.3 million, a second quarter record though it missed the Zacks Consensus Estimate of $429 million. Organic sales declined 5.1% in the quarter. In existing markets, non-residential roofing product sales declined 11.5%, complementary product sales increased 3.2% and residential roofing products dipped 1.4%. The current quarter benefited from the positive impact of several acquisitions completed since the start of last year.

Cost of goods sold increased 5% to $316 million in the quarter. Gross profit rose 6% to $99.6 million. Gross margin expanded 20 basis points to 23.9% from the year-ago quarter. Operating income in the reported quarter decreased 80% to $1.9 million with operating margin sliding 200 basis points to 0.5%.

Financial Position

Cash and cash equivalents declined to $16 million as of Mar 31, 2013 from $171 million as of Mar 31, 2012, mainly due to debt repayments this year and acquisitions. Total debt amounted to $221 million as of Mar 31, 2013, compared with $310 million as of Mar 31, 2012. Debt-to-capitalization ratio improved to 29.6% as of Mar 31, 2013 from 35.3% as of Mar 31, 2012.

Cash flow from operating activities declined to $20.6 million during the quarter from $80.3 million in the prior-year quarter due to less favorable changes in working capital, including additional inventory purchases made in 2013 ahead of announced price increases.

For 2013, Beacon Roofing estimates earnings per share to lie in the range of $1.75 to $1.85. Re-roofing continues to dominate a large share of the roofing market, amounting to over 80%.

Our Take

Beacon Roofing’s acquisition pipeline remains active and we expect the acquisitions to continue at an accelerated pace in the near term. Moreover, both residential and non-residential construction sectors are showing signs of improvement, which bodes well for the company.

Furthermore, over 80% of expenditures in the roofing market are for re-roofing projects, with the balance being for new construction. Demand for re-roofing is also on the rise providing ample scope for Beacon to expand in this market. Furthermore, the company will benefit from the pent up repair work for both residential and non-residential demand and due to the harsher winter witnessed.

Beacon is one of the three largest roofing material distributors in the United States and Canada, with more than 90% of sales coming from the U.S. Beacon Roofing currently maintains a short term Zacks Rank #3 (Hold).

Oher stocks in the same industry with a favorable Zacks Rank are Lumber Liquidators Holdings, Inc. (LL) with a Zacks Rank #1 (Strong Buy) while Builders FirstSource, Inc. (BLDR) and The Home Depot, Inc. (HD) both carry Zacks Rank #2 (Buy).

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