Beacon Roofing Supply, Inc. BECN, which belongs to the Zacks Building Products – Retail industry, has been grappling with lower net sales and earnings. The company’s margins remained pressurized throughout the year. Year to date, the stock has witnessed a decline of 9% against the industry’s growth of 28.4%.
Neither strong technology initiatives nor benefits from the Allied Building Products buyout have aided the stock performance in 2019. The largest distributor of residential and non-residential roofing materials has been witnessing lower storm-related demand over a year. Heavy rainfall in early 2019 across most regions served, higher raw material prices and competitive pricing pressures further added to the concerns.
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In fiscal 2019, the company’s existing market net sales grew just 3.3% year over year despite having an additional business day. Meanwhile, Beacon Roofing expects the first half of fiscal 2020 to remain soft as the incremental demand related to hurricanes, which the industry witnessed in early fiscal 2019, is not benefiting it anymore.
Raw material prices across a wide range of key items — including asphalt, steel and gypsum — as well as for inbound flatbed rates and outbound costs — including diesel and other delivery expenses — are high. Being a distributor of residential roofing supplies, Beacon Roofing is sensitive to highly volatile asphalt prices. This is because oil is a significant input in asphalt production. Consequently, shingle prices remain unstable.
In fiscal 2019, cost of goods sold (COGS), as a percentage of net sales, grew 40 basis points (bps) year over year. Adjusted EBITDA margin declined 80 bps in the same period. Going ahead, increased prices might impact demand for these products, resulting in lower sales volumes.
Moreover, heightened competitive pricing pressure is concerning for the company. The commercial roofing market has been experiencing extensive pricing pressures of late. Repair remodel activities, which represent the majority of product demand for Beacon Roofing, highly depends on economic factors and weather conditions. Furthermore, general market softness, volatile exchange rates and uncertainty regarding weather conditions remain concerning.
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However, the company has displayed resilience of late, which is a big boost before we enter 2020. Month to date, Beacon Roofing’s shares have gained 6%, outperforming the industry’s growth of just 0.8%. The recent growth can primarily be attributed to the company’s optimistic view for the second half of fiscal 2020.
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During fourth-quarter fiscal 2019 earnings discussion, management had expected strong second-half fiscal 2020 performance as the macroeconomic parameters are improving. For fiscal 2020, the company anticipates market demand to be relatively flat year over year.
The company, which shares space with BMC Stock Holdings, Inc BMCH, Builders FirstSource, Inc BLDR and GMS Inc GMS in the same industry, expects strong demand environment coupled with no incremental inflation in 2020 spring selling season. Post first-quarter fiscal 2020, it expects to witness EBITDA improvements, driven by higher gross margins, stronger sales growth and positive operating leverage.
The Zacks Rank #3 (Hold) company announced fixed cost-structure actions to reduce operating costs by $25 million to focus on growth and debt reduction. Of the said amount, it managed to reduce $4 million of operating costs in the fourth quarter of fiscal 2019. Moreover, its integration of Allied Building Products and other acquisitions helped it gain synergies.
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Further, Beacon Roofing remains focused on investing in additional tools and training for its employees to enhance productivity for consistently expanding product breadth and depth. Also, the company will likely gain from the successful execution of technology initiative in the growing e-commerce platform. Notably, it remains on track with the long-term target of generating $1 billion of annual digital sales.
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