Beacon Roofing (BECN) up 80% in one year: more space to operate?

Beacon Roofing Supply, Inc.. BECN benefits from solid demand in the residential housing market. Additionally, cost reduction efforts and productivity initiatives have helped the company reduce operating expenses, thereby increasing margins. Shares of Beacon Roofing have surged 80% over the past year, compared to the Zacks Building Products – Retail industry’s 23.4% growth. However, rising input prices, weather-related challenges and strong competition remain concerns. Let’s dig deeper.

Growth factors

Cost reduction efforts: Beacon Roofing is moving forward with the integration of the Allied Building Products acquisition. Regarding specific synergy elements, Beacon Roofing has begun to consolidate its sourcing programs to obtain the best sourcing arrangement from suppliers on a market by market basis. It is also progressing its employee transition process. The savings from these decisions are just beginning to contribute to reduced operating costs.

In the most recently reported quarter, the company’s gross margin improved by 270 basis points (bps) and adjusted EBITDA margin increased by 380 bps year-over-year. Cost reduction efforts and productivity initiatives have helped it reduce operating expenses, thereby increasing margins. As a percentage of net revenue, SG&A expenses contracted to 20.3%, or 170 basis points, compared to last year. For fiscal 2021, the company expects adjusted EBITDA of $560 million to $585 million from continuing operations, indicating a significant increase from fiscal 2020’s pro forma adjusted EBITDA of $399 million. .

Investments in digital platform and product improvement: The Zacks Rank #3 (Hold) company is focused on investing in its employees with additional productivity-enhancing tools and training to continually expand product breadth and depth, including the TRI private label offering -BUILT. The company is also targeting new customer subsets, including linking with national accounts, large retailers and 2-step customers. The company will also benefit from the successful execution of a technology initiative on the growing e-commerce platform. The company’s digital platform accounted for 10% of the company’s sales in fiscal 2020. It is on track to achieve its long-term goal of generating $1 billion in annual digital sales. Given the lower cost to serve, digital sales generally contribute to gross margin. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Strategic initiatives: Beacon Roofing plans to divest its interior products business, which is expected to strengthen its balance sheet, improve its financial flexibility and increase its focus on its core exterior business. Notably, 80 to 85% of the company’s ongoing business will involve residential and commercial roofing. Last year, the company made a strategic review decision. As part of this, the company has integrated 40 brands in the United States and Canada that sell exterior products under Beacon Building Products. The new name reflects its ability to provide its customers with a wide range of residential and commercial construction products as well as a unique service offering across North America.

Driven by a high concentration of non-discretionary repair and renovation requests, exteriors provide a unique platform for the business. It focuses on four key strategic initiatives – organic growth, digital, OTC (On-Time and Complete) and branch operational performance – which have driven sales and helped improve operational profitability. Importantly, the OTC Network is developed to support customers in-store and online with enhanced product availability, delivery tracking and notifications. As of December 31, 2020, the company operated 58 distinct markets and more than 250 outside branches participating in OTC.

High demand for R&R: Lately, Beacon Roofing is seeing increased demand for housing and repair and renovation activity amid COVID restrictions. Real estate markets have shown resilience recently, given low mortgage rates. With the opening of the economy, demand for housing and construction materials is improving given the growing trend of consumers investing more in real estate amid the pandemic. The recovery in housing demand has been a boon for Beacon Roofing and other industry players like FirstSource Builders, Inc. BLDR, Fastenal Company FAST, Lowe’s Companies, Inc.. WEAK.

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Concerns

As most of the company’s work is carried out outdoors and relies on repair and renovation activities, it is exposed to economic disruptions induced by COVID-19. Additionally, the cost of inputs has increased. Despite various cost-cutting initiatives, the company continues to experience inflationary pressures across most product categories.

Additionally, the commercial roofing market has recently experienced increased competitive pricing pressure. Additionally, although renovation and repair represent the majority of product demand for Beacon Roofing, the timing of these replacement decisions may vary due to economic factors and weather conditions.

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