JPMorgan Sends Beacon Roofing To The 'Penalty Box' After Q2 Miss

Beacon Roofing Supply, Inc. BECN saw its stock sell off more than 10 percent in reaction to a notable earnings miss in its fiscal second quarter, prompting JPMorgan to send the company to the "penalty box."

The Analyst

JPMorgan's Michael Rehaut downgraded Beacon Roofing Supply from Overweight to Neutral with a price target lowered from $63 to $53.

The Thesis

Beacon Roofing not only reported Q2 results "solidly below" expectations, but lowered its EBITDA guidance for the full fiscal year, Rehaut said in the downgrade note.

Beacon also lowered its gross margin guidance due to an increased price/cost lag, as the recovery of cost inflation has been slower than previously expected, the analyst said. 

Investors will remain especially focused on price/cost, and the ongoing headwind is unlikely to revert to a tailwind at any point in 2018, Rehaut said. JPMorgan now expects the company to merely match the performance of its building product peers over at least the coming one to two quarters.

JPMorgan revised its Beacon Roofing estimates as follows: 

• 2018 EPS from $3.62 to $3.40.
• 2019 EPS from $4.68 to $4.93.
• 2018 EBITDA from $580 million to $564 million.
• 2019 EBITDA from $732 million to $712 million.

The expectations for in-line performance with Beacon Roofing's peers implies that a new target multiple of 10x EV/EBITDA on 2019 estimates is warranted, below its five-year average of nearly 11x and current valuation of around 11.5x, Rehaut said. 

Price Action

Beacon Roofing shares were down 3.43 percent at $42.94 at the close Thursday.

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