Why to Hold Beacon Roofing (BECN) Stock Amid Inflationary Woes
Beacon Roofing Supply, Inc. BECN is gaining traction given its prudent Ambition 2025 long-term plans, focus on the enhancement of digital platforms and strategic buyouts. Shares of Beacon Roofing have gained 19.6% over the past year, outperforming the industry’s 1.5% rise.
The 2022 earnings estimate for this Zacks Rank #3 (Hold) company has moved upward to $6.82 per share from $6.78 over the past seven days. This positive trend signifies bullish analysts’ sentiments, indicating robust fundamentals and the expectation of outperformance in the near term. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
However, supply chain challenges, inflationary pressures and labor shortages are causes of concern for this largest publicly-traded distributor of residential and non-residential roofing materials.
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Let’s delve deeper and find out the factors that should drive growth further.
Ambition 2025 Plans: The company has been focusing on its Ambition 2025 targets which emphasize operational excellence, above-market growth trajectory and accelerated stockholder value creation. The financial targets of Ambition 2025 assume that sales will reach $9 billion (8% CAGR) and $1 billion of EBITDA (10% CAGR), which would translate into 11% EBITDA margins (up 100 basis points from 2021).
It remains on track and has been delivering above-market growth this year, given its prudent plans. BECN delivered 26% growth in net sales during the second-quarter 2022, marking a quarterly record for net sales from continuing operations. Year to date, the company acquired three single branch locations, rapidly accelerated the pace of investments in fleet, greenfields and share repurchases in addition to actively pursuing a strong pipeline of tuck-in acquisitions.
Digital Focus: The company is also expected to benefit from its successful execution of technology initiatives in the growing e-commerce platform. Its digital sales contributed 17% to the total residential sales during second-quarter 2022. It remains on track with the long-term target of generating $1 billion annual digital sales. The company has nearly 50% more active users on its online platform. The company is expanding its digital platform in value-added ways. Beacon Roofing continues to enhance the platform and add capabilities based on customer feedback. Given the lower cost to service, digital sales are generally accretive to gross margin.
Acquisitions: Beacon has been expanding its reach through bolt-on acquisitions. During the first six months of 2022, the company made three acquisitions. On June 2022, BECN acquired Complete Supply, Inc., a distributor of residential roofing and exterior building supplies to contractors and homebuilders in Willowbrook, IL. Complete Supply has been serving customers in the greater Chicago market for their residential and complementary product requirements. On Apr 29, 2022, BECN acquired a distributor of complementary residential exterior building supplies, Wichita Falls Builders Wholesale, Inc., for an undisclosed amount. Builders Wholesale has a three-decade history and strong reputation for serving customers in greater Wichita Falls, TX. Prior to that, on Jan 1, 2022, BECN acquired Crabtree Siding and Supply, a wholesale distributor of residential exterior building materials, including a broad offering of complementary products to contractors and homebuilder customers.
Higher Earnings Growth Rate: BECN’s earnings growth is also a key factor in stock valuation. The Zacks Consensus Estimate for 2022 earnings of $6.82 per share calls for 41.2% year-over-year growth. The solid growth rate depicts the stock's promising future.
Headwinds
The company has been witnessing higher input costs. Despite undertaking various cost-saving initiatives, the company continues to see inflationary pressures across most product categories. Although it has implemented various price increases to mitigate the inflationary pressure, higher input costs are a potent risk.
Adjusted operating expense was $369.6 million in the second-quarter 2022, an increase of $61 million compared to the year-ago quarter. The increase was driven primarily by increased headcount, inflationary pressures and wages, fuel, and lease-related expenses such as rents, real estate taxes, utilities and maintenance costs as well as higher incentive compensation given the strength of the company's performance.
Key Picks
Some better-ranked stocks in the Zacks Retail-Wholesale sector are Potbelly Corporation PBPB, Arcos Dorados Holdings Inc. ARCO and Dollar Tree Inc. DLTR.
Potbelly has a Zacks Rank #2 (Buy), at present. PBPB has a trailing four-quarter earnings surprise of 22.2%, on average. Shares of PBPB have declined 9.8% in the past year.
The Zacks Consensus Estimate for Potbelly’s 2022 sales and EPS suggests growth of 17.5% and 100%, respectively, from the corresponding year-ago period’s levels.
Arcos Dorados carries a Zacks Rank #2. ARCO has a long-term earnings growth of 34.4%. Shares of the company have increased 29.1% in the past year.
The Zacks Consensus Estimate for Arcos Dorados’ 2022 sales and EPS suggests growth of 27.1% and 104.2%, respectively, from the year-ago period’s levels.
Dollar Tree carries a Zacks Rank #2. DLTR has a trailing four-quarter earnings surprise of 13.1%, on average. The stock has gained 59.2% in the past year.
The Zacks Consensus Estimate for Dollar Tree’s 2022 sales and EPS suggests growth of 6.7% and 40.5%, respectively, from the corresponding year-ago period’s levels.
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Dollar Tree, Inc. (DLTR) : Free Stock Analysis Report
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Arcos Dorados Holdings Inc. (ARCO) : Free Stock Analysis Report
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