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Beacon Roofing Banks on Allied Business, Material Costs High

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Beacon Roofing Supply, Inc. (BECN - Free Report) is benefiting from solid integration of Allied Building Products, higher demand trend and positive housing industry. Aggressive cost-control measures and favorable price/cost relationship are adding to Beacon Roofing’s bliss.

Recently, the company reported better-than-expected results in second-quarter fiscal 2019. The upside was backed by positive organic growth, increased daily sales, aggressive cost-control measures and solid price-cost performance. Organic same-day sales during the quarter grew 1.2%, with approximately 5% growth in the Residential roofing business.

Notably, shares of the company have outperformed its industry so far this year. The company has gained 12.5% compared with its industry’s 7.6% growth in the said period. Bottom-line estimates for fiscal 2019 have remained stable over the past 30 days, while that of fiscal 2020 has moved 0.3% upward, depicting analysts' optimism over the company's earnings growth potential.

However, raw material price inflation and inclement weather are pressurizing its margins, thereby hurting the bottom line.

Let’s delve deeper into the factors substantiating its Zacks Rank #3 (Hold).

Catalysts Driving Growth

Beacon Roofing is riding high on Allied Building Products’ acquisition. Based in East Rutherford, NJ, Allied Building distributes roofing materials, drywall, ceiling tile and related accessories throughout the United States. This integration allowed the company to expand its business and product portfolio geographically, and on a scale and market basis. Also, it provided long-term growth opportunities to Beacon Roofing.

In fiscal 2018, it acquired Tri-State Builder’s Supply, a wholesale supplier of building products, and Atlas Supply, Inc., a leading distributor of sealants, coatings, adhesives and related waterproofing products. Notably, the company opened five new branches in first-half 2019, in order to penetrate deeper into the existing markets and enhance its presence.

Beacon Roofing primarily focuses on specific cost synergy components. It gained approximately $50 million synergies in fiscal 2018, up from previous expectation of $40 million. Notably, in the first half of fiscal 2019, its gross margin expanded 60 basis points (bps), benefiting from the favorable margin profile of acquired businesses and synergy contributions related to Allied.

Meanwhile, since January 2019, the overall housing industry is showing a positive market trend, given lower mortgage rates and improving job market. Consequently, demand for its roofing products is gaining traction. Notably, the company’s Residential roofing products, comprising 42.2% of existing market net sales, has been experiencing increased demand on the back of positive waves in the housing industry.

Notably, in the fiscal second quarter, the said business’ revenues grew 2.9% on the back of the above-mentioned tailwinds. The company has issued upbeat fiscal 2019 revenue and earnings guidance, as the housing market is reflecting optimism.

Causes of Concern

Beacon Roofing has been witnessing raw material price inflation over the last few quarters. Particularly, it has been experiencing higher asphalt, steel and gypsum costs, along with inbound flatbed rates and outbound costs, including diesel and other delivery expenses. As a distributor of residential roofing supplies, the company is sensitive to asphalt prices, which are highly volatile and often linked to oil prices. During the fiscal second quarter, cost of goods sold (as a percentage of net sales) grew 30 bps year over year. However, gross margin contracted 30 bps.

The company’s adjusted earnings during the fiscal second quarter decreased a significant 28.9% on a year-over-year basis. Notably, on a reported basis, it incurred a loss of $1.08 per share, which widened from the prior-year period due to a 5-6% increase in product cost during the quarter and an unfavorable mix shift.

Financial results of the company are prone to seasonal fluctuations, as a large portion of work is done outdoors. In the fiscal second quarter, its existing market sales (excluding acquisitions) decreased 0.4% from the prior-year period as a result of unfavorable weather conditions, particularly in Midwest and West markets.

Key Picks

Some better-ranked stocks in the same space include BMC Stock Holdings, Inc. (BMCH - Free Report) , Builders FirstSource, Inc. (BLDR - Free Report) and Tecnoglass Inc. (TGLS - Free Report) . While BMC Stock Holdings sports a Zacks Rank #1 (Strong Buy), Builders FirstSource and Tecnoglass carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Both BMC Stock Holdings and Builders FirstSource have a three-five year expected earnings growth rate of 5%.

Tecnoglass’ three-five year expected earnings growth rate is pegged at 20%.

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