Balanced Risk-Reward for Beacon Roofing - Analyst Blog

On Mar 27, 2014, we issued an updated research report on Beacon Roofing Supply, Inc. BECN. This roofing material distributor in the U.S. and Canada is expected to benefit from additional increases in product prices, continued focus on branch openings and strong balance sheet position.

Notably, the company opened 4 branches in the first quarter of fiscal 2014 and targets to open 25 additional branches by the end of the year, which should result in 2–3% organic growth. For 2015 and beyond, Beacon Roofing is planning to open at least 20 branches per year.

In addition, it is expected that the company will successfully pass on higher raw material costs to customers this year, as most manufacturers have announced a price increase ranging from 5-7%, effective from April. Beacon Roofing recently announced a separate increase in product prices to offset cost pressure on items such as insurance and benefits. The hike in price will range from 5-8%, effective from the beginning of Mar 2014.

The company reported cash and cash equivalents of $56.4 million as of Dec 31, 2013, up from $34 million as of Dec 31, 2012. Total leverage ratio was at 1.4x at the end of 2013 compared with 1.5x at the end of 2012.

Additionally, interest coverage ratio of Beacon Roofing was 16.7x compared with 14.9x at the end of 2012. These metrics demonstrates strength of the company's balance sheet, which will benefit its growth strategy.

Moreover, Beacon Roofing will benefit from its consistent focus on cost control. 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, for full year 2014, 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 6-8%. General market softness and uncertainty regarding weather conditions remain matters of concern.

Furthermore, Beacon Roofing belongs to a highly competitive industry. The maintenance, repair, & operations MRO supply market is highly fragmented, with many smaller local players competing directly on price. This can put pressure on margin of the company.

Beacon Roofing currently carries a Zacks Rank #3 (Hold).

Key Picks from the Sector

Some better-ranked stocks worth considering at the moment include Stock Building Supply Holdings, Inc. STCK and Travis Perkins plc (TVPKF) both with a Zacks Rank #1 (Strong Buy), and USG Corp. USG carrying a Zacks Rank #2 (Buy).