By:
Alec Jensen, 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. (NASDAQ: BECN) engages in the
distribution of residential and non-residential roofing materials. Beacon
Roofing Supply has three business segments: Residential Roofing (54% of
revenue), Non-residential Roofing (29% of revenue), and Complementary Building
(17% of revenue).
• Market leader with hundreds
of branches across the United States and Canada.
• Strategic acquisition
of Allied Building Products is key for current and future success.
• Improving gross margin
and trends in Repair and Replacement spending.
• The company has seen a
large sell-off in their stock over the past year, with a potential overreaction
by investors.
Key
points:
Beacon Roofing Supply is
positioned as the largest publicly traded distributor of roofing materials in
the United States and Canada. Despite having a challenging 2018, the company is
still set to capitalize on its network of over 589 branches in 50 states
throughout the U.S. Beacon generates most of its revenue from the repair and
replacement services they provide. Looking at the trends within this space,
according to the Joint Center for Housing Studies at Harvard, remodeling
spending should exceed 6% growth versus its usual growth of around 3-5%. While
very unfortunate, Hurricane Florence could also be a catalyst in 2018-2019 for
Beacon Roofing just like Hurricane Harvey was in 2017, due to the fact that
part of their main business is repairs.
A large part of Beacon’s
growth besides same-branch improvements and new branch openings is through
acquisitions. Most notably, the company acquired Allied Building Products Corp.
in 2017 for over $2.5 billion. Such a move by Beacon is significant because
their footprint in the roofing distribution market is now at about a 20% share.
As of the last quarter, the acquisition of Allied is creating synergies, $25
million year-to-date. Furthermore, on an operational basis, Beacon’s gross margin
has increased about 1% from the previous year along with record Q3 EBITDA of
$187.7 million. The company is benefiting from positive price-cost realization
across its different categories of products. Another more interesting
development for Beacon from a competitive standpoint is their new e-commerce
platform. While only a small part of their revenue generation, the company takes
pride in having the best platform out of its main competitors, helping its
customers and Beacon moving forward.
Looking at some of
Beacon’s risks, one of them is the inability to effectively integrate an
acquisition onto their operating platform. A result of such a failure would
mean lost cost savings and profitability. Although, this has not proven to be a
significant problem for the company. At this point, a question may arise as to
what is actually harming the performance of the stock. A possible reason for
the stock’s underperformance is that a portion of the products they sell are for
residential and non-residential construction. Homebuilder and construction
stocks have entered into a bear market, which might have effected Beacon. Also,
residential roofing shingles are seeing price increases, meaning Beacon’s
margins could take a hit if they can’t properly pass on the expenses to their
customers. It is important to note, though, that only 25% of the company’s
revenue comes from roofing shingles.
What
has the stock done lately?
After a great amount of
depreciation in stock price earlier this year, the last few months haven’t been
much better as the stock has fallen about 20% in the last 3 months. 13% of this
drop happened over one month’s time.
Past
Year Performance:
Beacon Roofing Supply’s
stock has had a tough last year. The stock is down 36.62% over this time period,
with a range of $32.66-66.47. There was a large sell off from the beginning of
the year to June, with concerns over BECN’s margins and the industry in
general. Even after this large sell-off, the stock has continued to decline
over the second half of the year with continued qualms about the building
products space.
Source:
FactSet
My
Takeaway:
While Beacon Roofing
Supply has not been a great investment over the last year, the company is still
a leading player in the roofing distribution space and should continue as one. There
are apparent risks with the company, but the stock has taken a huge haircut
over the past year. The macroeconomic trends for the company’s core business
seem stable and the acquisition of Allied Building Products will help the
company’s long-term profitability and create growth opportunities. I recommend
that Beacon Roofing Supply continue to be held in the AIM portfolio, but
monitored closely to see if company or market conditions change.
