Beacon Roofing Poised to Grow on Demand for Product Lines
Zacks Equity Research
Updated
We issued an updated research report on Beacon Roofing Supply, Inc. BECN on Nov 23.
Beacon Roofing reported adjusted earnings of 93 cents per share for fourth-quarter fiscal 2017 that increased 6% on a year-over-year basis, driven by strong sales growth within each of the three product lines — residential roofing, non-residential roofing and complementary products.
Growth Across All Product Categories
The residential roofing product line posted its 14th consecutive quarter of sales growth and continues to be the company’s strongest performing sector. Complementary products grew 7.3% and are anticipated to be the strongest performing product in 2018 given conducive conditions. The company is focused to grow this category, both organically and through acquisitions. It is a very large and growing market, and one of the elements that is expected to fuel growth moving forward. Both commercial and residential roofing is anticipated to surge in fiscal 2018. Beacon Roofing is also expected to benefit from the rebuilding activity triggered by the two back-to-back hurricanes, Harvey and Irma.
The company has initiated guidance for fiscal 2018. Total sales are projected in the range of $6.6-$6.9 billion, representing expected sales growth rate of 51-58%. Adjusted EBITDA is projected to be in the range of $560-$600 million and adjusted EPS to come in between $2.95 and $3.25. For comparison basis, Beacon Roofing’s adjusted earnings per share were at $2.68 in fiscal 2017.
Estimates on the Rise
Following the upbeat fourth quarter results and guidance, the Zacks Consensus Estimate for earnings has moved up 10% for fiscal 2018 and 22% for fiscal 2019, in the past seven days. The Zacks Consensus Estimate for fiscal 2018 is at $2.88 and for fiscal 2019 is at $3.55, reflecting a year-over-year growth of 32.17% and 23.14%, respectively.
Pending Allied Products Acquisition to Be Game-Changer
Beacon Roofing has struck a deal to acquire CRH plc's CRH U.S distribution business, Allied Building Products Corp. for $2.625 billion in cash. The buyout remains on track to close conclude in early January. The acquisition will catapult the company to one of the largest public wholesale building materials distributors in North America.
Through the buyout, Beacon Roofing would mark its foray in local markets in the New York, New Jersey and Upper Midwest while expanding foothold in other key markets including Texas, Florida, Colorado and California. The buyout will add about 50-60 cents to earnings per share in the first year. The combined company is anticipated to realize $110 million in run-rate synergies within two years of the deal closure.
Focus on Organic Growth and Acquisitions
Beacon Roofing opened one Greenfield branch in the fourth quarter, bringing the total number of branch openings to four in fiscal 2017. The company acquired 23 branched during the fiscal. It continues to balance year-to-year branch opening strategy with acquisitions. In fiscal 2017, the company closed five acquisitions with a cumulative sales run rate of more than $130 million of annual sales with 23 added branches. These buyouts are likely to improve geographic penetration and product portfolios across the United States.
In addition to growth through acquisitions, the company also remains focused on attaining organic growth. In fiscal 2017, the company introduced Beacon Pro+, its innovative e-commerce portal that enables customers to order online from a catalog of over 50,000 products. It also gives customers 24/7 access to view real time pricing, review the status of orders, request and approve quotes, and pay their bills online. This will enhance customer productivity and sales.
Re-Roofing Activity to Spur Growth
The roofing distribution market in the United States and Canada represents approximately $26 billion in revenues. Residential roofing comprises roughly 60-65% of this market and the balance 35-40% is commercial. Almost 80-90% of roofing demand is driven by re-roofing activity while the balance stems from new construction. As homes age, new and re-roof demand are on the rise as homeowners are forced to replace or repair old, deteriorating roofs. Over the last decade, the median age of owner occupied housing has increased from 31 years to 37 years, according to U.S. Census data.
This aging U.S. housing inventory in addition with more favorable trends in existing home sales, and deferred re-roofing amid the housing downturn reinforces a favorable supply/demand dynamic in the residential repair and remodel market in the coming years. Given that Beacon Roofing is the second largest distributor of residential and non-residential roofing materials in the United States, it is poised to benefit from this growth.
The company has outperformed the industry year to date. The shares have gained 28.8% while the industry registered an increase of 14.8%.
Zacks Rank & Key Picks
Beacon Roofing currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Other top-ranked stocks worth considering in the sector include Groupon, Inc. GRPN and The Home Depot, Inc. HD. Groupon has delivered an average positive earnings surprise history of 150.00% in the trailing four quarters. The stock has soared 71.1% year to date. Groupon sports the same Zacks Rank as Beacon Roofing.
The Home Depot has delivered an average positive earnings surprise history of 3.87% in the trailing four quarters. The stock has rallied 28.3% year to date. The stock carries a Zacks Rank #2 (Buy).
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