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Will Beacon Roofing's Cost-Cut Efforts Combat Margin Woes?

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Beacon Roofing Supply, Inc. (BECN - Free Report) has been benefiting from solid cost-cutting actions and technology initiatives. Also, strategic review of its business has been adding to the bliss.

This largest distributor of residential and non-residential roofing materials, which belongs to the Zacks Building Products - Retail industry, has been performing pretty well of late. Its shares have gained nearly 30% in the past three months, outperforming the industry’s rally of 19.3%.

Recently, it reported impressive third-quarter fiscal 2020 results, wherein both the top and bottom lines surpassed the Zacks Consensus Estimate by 1.9% and 52.5%, respectively. This was mainly backed by exceptional operating cost and cash flow performance for the quarter.

However, Beacon Roofing witnessed significant disruptions due to government restrictions owing to the virus outbreak. Also, this Zacks Rank #3 (Hold) company has been grappling with increased material costs and higher rate of unemployment.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Let’s delve deeper.

Strategic Initiatives to Improve Performance

Beacon Roofing announced fixed cost-structure actions to reduce operating costs by $25 million. The initiatives were focused on triggering overall growth and reducing debt. Of the said amount, it managed to reduce $4 million of operating costs in fourth-quarter fiscal 2019. Moreover, the integration of Allied Building Products and other acquisitions helped it gain synergies.

The company — which shares space with BMC Stock Holdings, Inc. (BMCH - Free Report) , Builders FirstSource, Inc. (BLDR - Free Report) and GMS Inc. (GMS - Free Report) in the same industry — integrated 40 brands across the United States and Canada to supply customers with a broad range of residential as well as commercial building products, along with a unique service offering across North America.

With this strategic action, its customers are likely to benefit from the industry’s best e-commerce platform, a new OTC (On-Time and Complete) Delivery Network and a newly-designed website. Markedly, these 43 OTC Networks are developed to support in-store and online customers with enhanced product availability, delivery tracking and notification.

Improving Demand for Residential & Non-Residential Products

Beacon Roofing has been witnessing improved demand for residential and non-residential products, which accounted for more than 70% of fiscal third-quarter 2020 revenues. After being hurt by government-led restrictions that hampered its major 10 markets, the company has recovered impressively. Moreover, resilient housing market prospects and repair and remodeling activities have been benefiting Beacon Roofing. About 70-75% of overall sales and more than 80% of the roofing business are R&R based, as well as largely non discretionary.

This apart, the company is now focusing more on building competitive differentiation, creating value for the existing customers, winning new customers and becoming a more efficient organization. Beacon Roofing remains focused on investing in additional tools and training for employees to enhance productivity for consistently expanding product breadth as well as depth. Also, the company is likely to gain from the successful execution of technology initiatives in the growing e-commerce platform.

In the current market situation, wherein customers and contractors are maintaining social distancing, it has been banking on the industry-leading digital platform — Beacon Pro+ and Beacon 3D+.

Major Threats

Beacon Roofing is vulnerable to adverse economic environments as most of the work is performed outdoor, and based on repair and remodeling activity. The company didn’t provide its fiscal 2020 guidance due to prevailing uncertainty regarding the COVID-19 pandemic. Although it has been experiencing a rise in demand, these market risks may dent its top-line performance in the near future. The company expects fiscal fourth-quarter revenues to decline in low single digits year over year.

During the fiscal third quarter, Beacon Roofing witnessed a rise in input costs from residential roofing manufacturers. These costs are likely to put pressure on its future margins. It expects adjusted operating costs — as a percentage of net sales — to be slightly up sequentially, reflecting a reversal of the temporary reduction in costs and expenses in the third quarter.

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