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Analyst Blog

Beacon Roofing Supply, Inc. (BECN - Analyst Report) reported record third-quarter 2012 adjusted earnings per share (EPS) of 62 cents, comfortably beating the Zacks Consensus Estimate of 56 cents and 22% higher than the year-ago quarter level. Including special items, EPS in the quarter stood at 53 cents, up 4% year over year from 51 cents.
 
Increase in sales, driven by acquisitions, and gross margin contributed to the growth. However, the positives were partially offset by higher operating expenses and income tax provision as compared with 2011.

Operational Update

Total revenue increased 4% year over year to $560.5 million, benefiting from acquisitions. However, reported revenue lagged the Zacks Consensus Estimate of $584 million. Organic growth declined 1.5% in the quarter.

In existing markets, residential roofing product sales increased 1.7% while non-residential roofing and complementary product sales declined 4.9% and 3.0%, respectively. The last year quarter benefited from substantial roofing activities based on the hail storms in spring 2011. Furthermore, warmer winter conditions this year led to higher roofing and exterior remodeling activities in the second quarter that otherwise would have been performed in the third quarter.

Cost of goods sold increased 1.4% to $419.7 million in the quarter. Gross profit rose 11% to $140.7 million. Operating income in the reported quarter improved to $51.3 million from $43 million in the year-ago quarter.

Financial Position

Cash and cash equivalents were $31.2 million as of June 30, 2012, compared with $171.1 million as of March 31, 2012. Total debt amounted to $608.5 million as of June 30, 2012, compared with $580.4 million as of March 31, 2012. Debt to capitalization ratio improved to 31.5% as of June 30, 2012 from 35.3% as of March 31. 2012.

Cash inflow from operating activities was $35.3 million during the first nine months of 2012 compared with $37.7 million in the comparable period last year. Cash flows in the first half of 2012 were positively impacted by higher net income and non-cash charges, partially offset by less favorable changes in working capital.

Our Take

Beacon Roofing’s growth strategy largely depends on acquisitions, which has been the primary growth driver since its inception. Backed by its strong balance sheet, the company has recently acquired Structural Materials Company in Southern California in early July and Contractors Roofing & Supply Co. in St. Louis. The company is seeking other acquisition opportunities to enhance its growth profile. Furthermore, demand for re-roofing is also on the rise providing ample scope for Beacon to expand in this market.  

Beacon is one of the three largest roofing material distributors in the United States and Canada, with more than 90% of sales coming from the U.S. Beacon competes with privately-held American Builders & Contractors Supply Co Inc., Guardian Building Products Distribution Inc. and Stock Building Supply Inc. Beacon Roofing currently maintains a Zacks #3 Rank (Hold) over the short term.

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