Beacon Enters Northern California (BECN) (LL)

Beacon Roofing Supply, Inc. (BECN) has recently acquired San Jose-based Ford Wholesale Co., a distributor of residential and commercial roofing and related accessories and Construction Materials Supply, a distributor of residential roofing products.

These acquisitions mark Beacon Roofing’s foray into the attractive North California market. The Ford Wholesale acquisition will add three locations in the region to Beacon Roofing’s kitty while Construction Materials Supply will add two stores. The two acquisitions will increment Beacon Roofing’s sales by approximately $60 million.

As of November 30, 2012, the company had 10 locations in the California compared with 4 locations as of November 30, 2011. The company now intends to increase its presence in the North California market.

Acquisitions are an important part of Beacon Roofing’s growth strategy. Over the last 10 years, the company has grown through a combination of 22 strategic and complementary acquisitions, including opening new branch locations, acquiring branches and broadening its product offering. Sales have grown at a 10-year compound annual growth rate of 14.0%. The company’s internal growth, which includes growth from existing and newly opened branches but excludes growth from acquired branches, has averaged 4.7% annually over the same period.

Earlier, the company announced the acquisition of Structural Materials Company in Southern California, Contractors Roofing & Supply Co. in St. Louis and Pennsylvania-based McClure-Johnston Company. The company’s prime focus is to target market leaders in geographic areas where it does not have a presence. Beacon Roofing also acquires companies to supplement branch openings within existing markets. Beacon Roofing remains fairly active on the acquisition front and we expect the acquisitions to continue at an accelerated pace in the near term.

However, this acquisition driven growth strategy exposes the company to acquisition related risks. Management may have trouble finding suitable acquisition candidates that provide synergies in existing markets and upfront earnings accretion.

Both U.S. residential and non-residential construction sectors are finally stabilizing and are on the road to a much-awaited recovery, which bodes well for the Beacon Roofing. Demand for re-roofing is also on the rise given an aging U.S. housing stock. Beacon Roofing currently maintains a Zacks #3 Rank (Hold) over the short term.

Beacon Roofing is a leading distributor of roofing materials and complementary building products. It currently operates 229 branches encompassing 38 states in the United States and Canada. Lumber Liquidators Holdings, Inc. (LL) is another Zacks #3 Rank stock in the same industry.