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On Nov 28, Zacks Investment Research downgraded Beacon Roofing Supply, Inc. (BECN - Analyst Report), one of the three largest roofing material distributors in the U.S. and Canada, to a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

On Nov 26, Beacon reported lower-than-expected fourth-quarter fiscal 2013 (ended Sep 30, 2013) results.

Adjusted earnings per share declined 7% to 56 cents from 60 cents earned in the year-ago quarter. The results fell short of the Zacks Consensus Estimate of 62 cents. Despite record revenues and continued cost control, lower gross margins led to the year-over-year decline.

Revenues in the quarter increased 14% year over year to a record $683 million, but missed the Zacks Consensus Estimate of $689 million.

Gross margin contracted 190 basis points year over year to 23.1% due to continued impact of product cost increases, that have not been passed on to customers, and a higher mix of non-residential roofing products.

In addition, the Architecture Billings Index in October fell to 51.6 after hitting a seven-month high of 54.3 in September, reflecting the uncertain U.S. economic outlook. Moreover, higher construction costs, labor shortage and lack of funds for real estate projects are likely to remain headwinds for the non-residential construction sector and may affect the company.

Beacon delivered negative earnings surprises in three of its last four quarters with an average negative surprise of roughly 14%. Following the fourth-quarter earnings announcement, the Zacks Consensus Estimate for Beacon dropped 4% to $1.80 per share for fiscal 2014 and around 1% to $2.13 a share for fiscal 2015.

Other Stocks to Consider

Better-ranked stocks in the same industry include Builders FirstSource, Inc. (BLDR - Snapshot Report) and James Hardie Industries plc both with a Zacks Rank #1 (Strong Buy), as well as Lumber Liquidators Holdings, Inc. (LL - Snapshot Report) carrying a Zacks Rank #2 (Buy).

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