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Beacon Roofing Earnings Lag Despite Record Revs

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Shares of Beacon Roofing Supply, Inc. (BECN - Free Report) gained 3% since it reported record revenues in the fourth-quarter and fiscal 2013 (ended Sep 30, 2013) on Nov 26. However, adjusted earnings per share dropped 7% year over year to 56 cents dragged down by lower gross margins. The results also fell short of the Zacks Consensus Estimate of 62 cents.

Including one-time items, earnings per share were 55 cents compared with 58 cents in the year-ago quarter.

Operational Update

Total revenue increased 14% year over year to a record $683 million, but missed the Zacks Consensus Estimate of $689 million. Organic sales improved 7.6% in the quarter. In existing markets, non-residential roofing product sales increased 10%, while residential roofing products sales increased 6%. Complementary product sales increased 5% year over year. The reported quarter benefited from the positive impact of acquisitions as well.

Cost of goods sold increased 17% year over year to $526 million. Gross profit rose 5% to $158 million from $150 million in the year-ago quarter. Gross margin contracted 190 basis points year over year to 23.1% due to the continued impact of product cost increases that have not been passed on to customers and a higher mix of non-residential roofing products.

Operating expenses for the quarter went up 9% to $110 million. Operating income decreased 2% year over year to $47.6 million. Consequently, operating margin slid 110 basis points year over year to 7%.

Financial Position

Cash and cash equivalents increased to $47 million as of Sep 30, 2013, from $40 million as of Sep 30, 2012. Total debt amounted to $272 million as of Sep 30, 2013, compared with $278 million as of Sep 30, 2012. Debt-to-capitalization ratio declined to 26% as of Sep 30, 2013, from 30% as of Sep 30, 2012. Cash flow from operating activities declined to $78 million in fiscal 2013 from $85 million in the prior-year quarter, owing to lower non-cash charges this year.

Fiscal 2013 Performance

Beacon Roofing reported adjusted earnings of $1.47, a 7% decline from $1.58 in the prior fiscal. Including one-time items, earnings were $1.45 per share compared with $1.67 in fiscal 2012. Revenues increased 10% to a record $2.24 billion from $2 billion in the prior year.

Our Take

Beacon Roofing will be benefited by continued focus on cost control. Beacon Roofing’s acquisition pipeline remains active and we expect the acquisitions to continue at an accelerated pace in the near term. The company opened 7 new branches in the quarter, accomplishing the target of 10 branches that for 2013.

Beacon Roofing is on track to open another 15 to 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; thus providing ample scope for Beacon to expand in this market.

Peabody, MA-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). Some better-ranked stocks in the building products – retail/wholesale sector include Builders FirstSource, Inc. (BLDR - Free Report) , James Hardie Industries plc and Lumber Liquidators Holdings, Inc. (LL - Free Report) . While Builders FirstSource and James Hardie Industries carry a Zacks Rank #1 (Strong Buy), Lumber Liquidators holds a Zacks Rank #2 (Buy).

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