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On Sep 19, we downgraded our recommendation on Beacon Roofing Supply, Inc. , one of the three largest roofing material distributors in the U.S. and Canada, to Underperform following weak third-quarter fiscal 2013 (ended Jun 30) results and its downwardly revised earnings guidance.

Why the Downgrade?

On Aug 9, Beacon Roofing reported adjusted earnings of 55 cents per share for the third quarter, down 11.3% year over year, impacted by tough weather conditions and increase in product cost. The results also missed the Zacks Consensus Estimate of 71 cents. Net sales rose 12% year over year to $627.2 million, but missed the Zacks Consensus Estimate of $663 million.

The inability of Beacon Roofing to successfully pass on higher raw material costs to customers will also have a negative impact on its results. Since Dec 2012, two major price increases on shingles have been announced by manufacturers. Some of these increases were passed along with the product cost. In the third quarter, gross margin contracted 150 basis points (bps) year over year to 23.5%, largely owing to pricing pressure.

For 2013, Beacon Roofing lowered its earnings per share forecast to $1.50–$1.60 from $1.75–$1.85 due to subdued demand and increase in competition. Additionally, higher construction costs, labor shortage, lack of funds for real estate projects, and adverse effects of sequestration are likely to remain headwinds for the non-residential construction sector and may affect the company.

Following the last earnings release, the Zacks Consensus Estimate for 2013 and 2014 have gone down 13.9% and 8.6%, respectively, to $1.55 and $1.92 per share, respectively. With earnings estimates moving down, Beacon Roofing retains a Zacks Rank #5 (Strong Sell).

Other Stocks to Consider

Among the other stocks in the same industry with favorable Zacks rank, Lumber Liquidators Holdings, Inc. , Builders FirstSource, Inc. and The Home Depot, Inc. are worth a look. While Lumber Liquidators holds a Zacks Rank #1 (Strong Buy), both Builders FirstSource and The Home Depot carry a Zacks Rank #2 (Buy).

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