Beacon Roofing Supply, Inc. (BECN Quick QuoteBECN - Free Report) , the second-largest distributor of residential and non-residential roofing materials in the U.S. and Canada, has been performing well of late. The company is poised to benefit from acquisitions, growth in residential and non-residential building construction activity as well as sustained demand in re-roofing activity. The stock has an estimated long-term earnings growth rate of 13.75%.

Favorable Zacks Rank, Score

Beacon Roofing carries a Zacks Rank #2 (Buy) and a VGM score of “B”. Here V stands for Value, G for Growth and M for Momentum. Beacon Roofing’s score is a weighted combination of these three scores (Value - B, Growth - A, Momentum - B). Such a score allows you to eliminate the negative aspects of stocks and select winners.

Robust Q1 Performance

Beacon Roofing’s adjusted earnings in the fiscal first quarter 2017 grew 7% year over year to 44 cents. Sales were a record $1.002 billion, up 2.6% year over year. Interestingly, this was the third consecutive quarter in which sales exceeded $1 billion. The quarter marked the company’s 11th consecutive quarter of residential organic sales and the ninth straight quarter of year-over-year gross margin expansion. It was the first quarter in which gross margin improved more than 100 basis points (bps).



Beacon Roofing’s share price has increased 10.1% since the fiscal first-quarter result announcement on Feb 2. The company has also outperformed the Zacks categorized Building Products-Retail/Wholesale industry over the same period. Shares have gained 11.5% while the industry registered an increase of 10.1% in the same time frame.

We note that the industry is also favorably placed as it occupies a space in the top 29% of the Zacks classified industries (74 out of the 256).

Upbeat Guidance

For fiscal 2017, the company expects total revenue growth in the range of 3–7%, which assumes 2–5% organic and 1–2% incremental contribution from acquisitions made in fiscal 2016. EBITDA will likely be in the range of $365–$395 million, which translates to EBITDA margins of 8.6–8.9%.

The company will continue to focus on revenue growth, both organically and through acquisitions while improving margins and operating expense leverage in fiscal 2017.

The Zacks Consensus Estimate for revenues is at $4.33 billion for fiscal 2017, reflecting 4.97% year-over-year growth, within the management guidance. The estimate for fiscal 2018 of $4.54 billion projects 4.87% annual growth. The Zacks Consensus Estimate for earnings for fiscal 2017 of $2.33 depicts growth of 11.14% while the estimate for fiscal 2018 reflects year-over-year growth of 14.31%.

Positive Earnings Surprise History

Beacon Roofing has outpaced the Zacks Consensus Estimate in three of the trailing four quarters, delivering a positive average earnings surprise of 28.08%.

Growth Drivers

Economic indicators suggest continued recovery for residential and commercial end markets. The housing scenario will remain favorable in 2017 with economists anticipating a low-double digit increase in single-family housing starts and a low to mid-single-digit increase in existing home sales. Housing turnover will likely be a catalyst in triggering re-roofing activity. Commercial indicators are also positive as business estimates are expected to increase in the low to mid-single digits on an inflation adjusted basis. Beacon Roofing’s growth initiatives will boost residential sales growth to levels consistent with low to mid-single digit growth targets.

The company stated that it has a solid pipeline of acquisitions and will continue to pursue selective takeovers. In addition to growth through acquisitions, the company also remains focused on attaining organic growth. Utilizing technology, the company continues to drive selling effectiveness through its CRM platform and has more than 1000 key employees utilizing this tool. Additionally, the company is in the early stages of its eCommerce rollout, which will enhance customer productivity and sales. It is also progressing toward two-step selling to lumber dealers and national account expansion businesses. These are key elements of its growth strategy along with acquisitions, greenfield branches and existing branch organic growth

Stock Seems Undervalued

Beacon Roofing has a trailing 12-month price earnings (P/E) ratio of 23.34 while the Zacks categorized sub industry’s average trailing 12-month P/E ratio is 23.66. Based on this ratio, the stock seems undervalued.

Other Stocks to Consider

Some other stocks worth considering in the sector include Rush Enterprises, Inc. (RUSHA Quick QuoteRUSHA - Free Report) , Tech Data Corporation and Papa Murphy's Holdings, Inc. (FRSH Quick QuoteFRSH - Free Report) . All of these stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Rush Enterprises has delivered an average earnings surprise of 12.78% in the trailing four quarters. Tech Data and Papa Murphy's Holdings delivered an average positive earnings surprise of 8.73% and 147.69%, respectively in the past four quarters

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