Beacon Roofing Misses Estimates (BECN) (BLDR) (FAST) (LOW)

Operational Update

Total revenue increased 5% year over year to $513.7 million but missed the Zacks Consensus Estimate of $531 million. Organic sales declined 4.6% in the quarter. In existing markets, complementary product sales increased 2.9% but both residential and non-residential roofing product sales decreased 5.4% and 6.1%, respectively.

The current quarter benefited from the positive impact of several acquisitions completed since the start of last year, offset by lower average residential roofing selling prices. The quarter was pitted against a strong year-ago quarter, which saw a very high level of re-roofing activity, including the beneficial impact from mild weather in Dec 2011 and strong business in several markets that experienced significant storms in 2011.

Cost of goods sold increased 4% to $387 million in the quarter. Gross profit rose 8% to $127 million. Gross margin expanded 70 basis points to 25% from the year-ago quarter. Operating income in the reported quarter decreased 6% to $32 million with operating margin contracting 70 basis points to 6.3%.

Financial Position

Cash and cash equivalents declined to $34 million as of Dec 30, 2012 from 155 million as of Dec 31, 2011, mainly due to debt repayments this year and acquisitions. Total debt amounted to $62.8 million as of Dec 30, 2012, compared with $15 million as of Dec 30, 2011. Debt-to-capitalization ratio increased to 22.1% as of Dec 31, 2012 from 4.7% as of Dec 31, 2011.

Cash flow from operating activities improved to $47.3 million during the quarter from $59 million in the prior-year quarter due to less favorable changes in working capital, including additional inventory purchases made in 2013 ahead of announced price increases.

Our Take

Beacon Roofing’s acquisition pipeline remains active and we expect the acquisitions to continue at an accelerated pace in the near term. Moreover, both residential and non-residential construction sectors are showing signs of improvement, which bodes well for the company.

The company has recently acquired Structural Materials Company in Southern California, Contractors Roofing & Supply Co. in St. Louis and Pennsylvania-based McClure-Johnston Company. Its main acquisition strategy is to target market leaders in geographic areas that it does not have a presence. Beacon Roofing also acquires companies to supplement branch openings within existing markets.

Furthermore, over 70% of expenditures in the roofing market are for re-roofing projects, with the balance being for new construction. Re-roofing projects are generally considered maintenance and repair expenditures and are less likely to be postponed during periods of recession or slow economic growth. As a result, demand for roofing products is less volatile than overall demand for construction products. Demand for re-roofing is also on the rise providing ample scope for Beacon to expand in this market.

Beacon is one of the three largest roofing material distributors in the United States and Canada, with more than 90% of sales coming from the U.S. Beacon competes with privately-held American Builders & Contractors Supply Co Inc., Guardian Building Products Distribution Inc. and Stock Building Supply Inc. Beacon Roofing currently maintains a short term Zacks Rank #2 (Buy).

Material supplies rival Fastenal Company (FAST) reported diluted earnings of 33 cents per share in the fourth quarter of 2012, up 10.0% on the back of decent margin growth, and in line with the Zacks Consensus Estimate. Its other peers such as Builders FirstSource, Inc. (BLDR) and Lowe's Companies Inc. (LOW) are yet to announce their fourth quarter results.