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Beacon Roofing Earnings & Revs Lag in Q3

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Beacon Roofing Supply, Inc. (BECN - Free Report) reported third-quarter fiscal 2013 (ended Jun 30, 2013) adjusted earnings per share of 55 cents compared with 62 cents earned in the year-ago quarter. The results fell short of the Zacks Consensus Estimate of 71 cents. Tough weather conditions and increase in product cost led to the decline.

Reported profit for the quarter was $27.2 million (or 55 cents a share), up 8% from $25.4 million (or 53 cents per share) recorded a year ago. The year-ago quarter’s results included refinancing cost of 6 cents per share and increase in liability of 3 cents per share. No such item was recorded in the reported quarter.

Operational Update

Total revenues increased 12% year over year to $627.2 million, but missed the Zacks Consensus Estimate of $663 million. Organic sales improved 1.2% in the quarter. In existing markets, non-residential roofing product sales edged up 1.1%. Complementary product and residential roofing products sales increased 5.2% and 0.2% year over year, respectively. The reported quarter benefited from the positive impact of several acquisitions and organic sales gain, partly offset by unusually heavy rains, harsh weather as well as negative impact from hail storms.

Cost of goods sold increased 14% year over year to $479.8 million. Gross profit rose 4.6% to $147 million from $140.7 million in the year-ago quarter. Gross margin contracted 150 basis points year over year to 23.5%. Pricing pressure due to weaker demand hurt gross margin.

Operating expenses for the quarter crept up 11% to $99 million, due to increased expenses from the acquisitions. Operating income decreased 6% year over year to $47.9 million. Consequently, operating margin slid 150 basis points year over year to 7.6%.

Financial Position

Cash and cash equivalents declined to $26 million as of Jun 30, 2013, from $31 million as of Jun 30, 2012. Total debt amounted to $229 million as of Jun 30, 2013, compared with $234 million as of Jun 30, 2012. Debt-to-capitalization ratio declined to 24% as of Jun 30, 2013, from 27.8% as of Jun 30, 2012.

Cash flow from operating activities improved to $49 million in the quarter from $35 million in the prior-year quarter owing to favorable changes in working capital.

For 2013, Beacon Roofing lowered  its earnings per share forecast to $1.50–$1.60 from its previous view of $1.75–$1.85. Capital expenditure is expected to be around 1% to 1.2% of sales for the full year, as a result of continued fleet upgrades. The company expects gross margin for the fourth quarter in the band of 23%–23.5%.

Beacon Roofing will be benefited by continued focus on cost control and gross margin improvement. The company also expects new construction market improvement to drive growth.

Our Take

Beacon Roofing’s acquisition pipeline remains active and we expect the acquisitions to continue at an accelerated pace in the near term. In addition to 19 branches acquired so far in 2013, the company opened 2 new branches in the quarter. Beacon Roofing is also on track to open 20 branches in 2014.

Moreover, both residential and non-residential construction sectors are showing signs of improvement, which bodes well for the company. Demand for re-roofing is also on the rise providing ample scope for Beacon to expand in this market. However, harsh weather, lower storm demand and intensified competition will remain headwinds in the upcoming quarters.

Peabody, Mass.-based, Beacon Roofing is one of the largest distributors of residential and non-residential roofing materials and complementary building products in the U.S. and Canada, with more than 90% of sales coming from the U.S.

Beacon Roofing currently maintains a Zacks Rank #5 (Strong Sell).

Oher stocks in the same industry with favorable Zacks rank are Lumber Liquidators Holdings, Inc. (LL - Free Report) with a Zacks Rank #1 (Strong Buy) as well as Builders FirstSource, Inc. (BLDR - Free Report) and The Home Depot, Inc. (HD - Free Report) with a Zacks Rank #2 (Buy).

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