Baird Upgrades Beacon Roofing After RSG Acquisition, Says Questions Appear Answered

In a report published Tuesday, Baird analyst David J. Manthey upgraded the rating on

to Outperform, while raising the price target from $33 to $40, following the acquisition of

. Analyst David Manthey believes that RSG is "a good strategic fit" that is being purchased at "a seemingly very attractive multiple," and that the synergies expected over the next couple of years are "realistic." "We had been negative on the BECN story since our downgrade nearly two years ago based on lackluster re-roofing demand, potential downside to shingle pricing and balanced risk/reward relative to our price target," Manthey said. He added that while re-roofing demand had remained lackluster, non-residential and overall construction demand had provided "a moderate offset" and shingle prices had unexpectedly remained "fairly resilient" so far this year. With this, there was "solid upside" to the price target, and the scales had "tilted," the analyst said. Baird noted in the report that the questions surrounding RSG's EBITDA margins and the expected synergies had now been answered. Manthey comments that "a subsequent 8-K filing, credit rating agency documents and other inputs" had indicated that RSG's EBITDA margins were mid- to upper-single-digits, "putting the acquisition multiple (including synergies) at the higher end of, but within, BECN's historical range." "Synergies in the areas of general & administrative, branch and procurement costs seem logical, reasonable and consistent with BECN's acquisition history," the report added.