Tuesday, May 9, 2017

A current AIM Fund holding: Beacon Roofing Supply (BECN) by Jordan Luczaj:“Things are looking up"

Beacon Roofing Supply, Inc. (BECN, $49.61): “Raising the Roof”
By: Jordan Luczaj, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

Beacon Roofing Supply, Inc. (NYSE:BECN) is the second largest distributor of residential and non-residential roofing materials in the United States. Their product segment is roofing materials; however, they also distribute siding, windows, specialty lumber products, and waterproofing systems for residential and non-residential roofing products.  

• BECN has continued to be active in the M&A market, averaging a purchase every 1-2 months.

• Beacon is profiting from continued growth in the residential construction industry and an increase in residential building permits in the United States. 93% of total business is done in the US markets and 53% of sales are residential.

• Currently, Beacon is trying to capitalize on the complementary products that they offer, and have seen growth in 12 of the last 15 quarters.

• BECN will continue to advance technologically, and are planning on an e-commerce rollout

Key points: Beacon Roofing Supply, Inc. has continued to grow since being put in the portfolio a year ago, and key executives do not see it stopping anytime soon. M&A activity is a driving force in their expansion project, especially as they look to expand further into the complementary product markets.

BECN has profited from a rejuvenating real estate market, Hurricane Matthew increasing demand for roof repairs on the east coast, and a significant uptick in the rainfall in northwestern states. Beacon makes a substantial amount of revenue, 53%, on roofing repairs, and repairs have grown as a result of the damage done by these natural disasters.

The M&A market has provided a huge growth opportunity for Beacon. The RSG acquisition in 2015 allowed them to realize synergies on buying power during FY 2016 and should start to run out in the next few months. However, they have already made four acquisitions this year: BJ Building Material Supply Co., American Building & Roofing, Inc., Ecofoam Insulation Supply, Inc., and Acme Building Materials. American Building & Roofing Inc. is a residential and commercial roofing materials company that operates on the northwestern coast and will help BECN capitalize on an increased rainy season in Northern California and Washington.

BECN also saw augmented SG&A expenses in FY 2016. Management hit on this fact, and attributed it to some unforeseen and unusual expenses such as: fleet repairs and maintenance costs, insurance related costs, and sales meetings. Management has said that these costs should decrease, and that the pace should not remain throughout FY 2017.

What has the stock done lately?
YTD Beacon Roofing Supply, Inc. has returned ~11%, and since their last earnings call they have jumped from $45.51 to $49.61. The stock has been on a steady increase since a year ago due to the upsurge in building permits and residential construction starts throughout the US. The stock appears to be set for a strong 2017; however, they report Q2 earnings on May 4, 2017, and this quarter always underperforms and produces a negative EPS.  

Past Year Performance:
BECN has produced a 16.18% return over the last 12 months, and is producing much better than the industry. Over the last year, they have outpaced the industry because of their large volume of M&A transactions. They did miss earnings back in November of 2016, but have rebounded nicely six months later.

Source: FactSet

My Takeaway
Beacon reached its price target on March 14, 2017, but may still be on the rise. Confidence in the current US real estate market and new construction continues to climb. In March 2017, US privately owned housing starts were up 9.2% year over year and building permits had risen 17.0% year over year. The US real estate market remains strong, and with a lot of real estate transactions occurring, roofs are being thoroughly inspected leading to more repairs and remodels. Thus, BECN shows potential to “raise the roof” on their stock price in FY 2017.

Source: FactSet