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.
Summary
• 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
