Beacon Roofing Supply, Inc. BECN reported its fiscal second-quarter earnings Tuesday, which prompted Jefferies to no longer hold a bullish stance on the stock for three key reasons.
The Analyst
Jefferies' Philip Ng downgraded Beacon Roofing from Buy to Hold with a price target lowered from $73 to $56.
The Thesis
Expectations heading into Beacon Roofing's earnings release was low but the print disappointed, Ng said in a note.
First, gross margin was "squeezed" by 80 basis points due to a negative price and cost spread and this dynamic is unlikely to improve in the near-term. The last time the company realized a favorable spread was back in 2011, Ng said.
Second, the analyst said Beacon Roofing faces difficult comps for the back half of 2018 as it will lap favorable storm activity. There are also concerns that volume will lag the market as what was seen when Beacon Roofing acquired Roofing Supply Group in 2015.
Finally, the ongoing integration of Allied continues is generating "some skepticism" as the company has seen "setbacks" in with managing its operating expenses, the analyst wrote. During the recently reported quarter the company's "sizable" miss was due to poor operating expense containment from lower operating leverage and higher merit increases. As such, the Street's expectations for synergies from Allied of $140 to $150 million is overly optimistic with a more realistic figure being in the $110 to $120 million range.
Price Action
Shares of Beacon Roofing Supply were trading lower by more than 10 percent Wednesday at $44.76.
Buy Beacon Roofing For Accelerating Earnings, M&A Opportunities
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