Loss Widens at Beacon Roofing, Shares Fall - Analyst Blog

Shares of Beacon Roofing Supply, Inc. BECN dropped 5.2% after the company reported a loss in the second quarter of fiscal 2014 (ended Mar 31, 2014) on May 9. Loss per share on an adjusted basis was at 25 cents per share compared with a prior-year loss of 2 cents per share, impacted by severe winter weather across most of its markets. The loss per share was also wider than the Zacks Consensus Estimate of a loss per share of 6 cents.

On a reported basis, loss was 25 cents per share in the quarter versus a breakeven result the year-ago. The company had no one-time items in the reported quarter, while prior year quarter had refinancing charges of 2 cents.

Operational Update

Total revenue decreased 7.5% year over year to $384.9 million, lagging the Zacks Consensus Estimate of $419 million. In existing markets, non-residential roofing product sales declined 2.3% and residential roofing products sales fell 12.1%. Complementary product sales also decreased 4.1% year over year.

Cost of goods sold went down 5.9% year over year to $298 million. Gross profit was $86.8 million, compared with $99.7 million in the year-ago. Gross margin contracted 130 basis points (bps) from the prior-year to 22.6% primarily due to lower demand in marketplace, coupled with a decrease in selling prices.

Operating expenses for the quarter rose 6.4% year over year to $104 million. The company posted an operating loss of $17 million against an operating profit of $1.9 million in the prior year quarter.

Financial Position

As of Mar 31, 2014, Beacon Roofing had cash and cash equivalents of $34 million, up from $16.7 million as of Mar 31, 2013. Total debt was $35.9 million as of Mar 31, 2014 against $26.7 million as of Mar 31, 2013. The debt-to-capitalization ratio expanded 80 basis points to 4.5% as of Mar 31, 2014, from 3.7% as of Mar 31, 2013. Cash flow from operations was $36.1 million for the period of six months ended Mar 31, 2014, up from $20.6 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 $1.50 to $1.80. The company provided 2014 operating income guidance in the range of 6%—8%. It believes organic sales growth should be in the band of 5%—8% and expects that demand for remainder of the year will be strong.

Our Take

Beacon Roofing will benefit from its consistent focus on cost control. Its investments in equipment and inventory, along with employee training and greenfield expansion will drive growth.

The company opened 8 new Greenfield openings in first half of fiscal 2014 and 4 new 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.

Complementary business will grow in the second half, driven by development in new construction and remodeling activity. Commercial business will also expand in the second half, given the number of projects and bids currently in process.

The company initiated price increase, which will help offset some of the internal cost increases like insurance and benefits. Both residential and non-residential construction sectors are showing signs of improvement, which bode well for the company. However, a difficult pricing environment will continue to weigh on gross margins.

Peabody, MA-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 #3 (Hold). However, some better-ranked stocks in the same industry include Simpson Manufacturing Co., Inc. SSD, Aegion Corp. AEGN and Installed Building Products, Inc. IBP. While Simpson holds a Zacks Rank #1 (Strong Buy), Aegion and Installed Building carry a Zacks Rank #2 (Buy).