Beacon Roofing Could Rise 40%

September 27, 2014

Last year's relatively mild hurricane season came as a relief after eight straight years of punishing storms. But not for the residential roofing industry, which has seen a falloff in demand over the past year. Slow sales of existing homes have also hurt.

But with over 60% of U.S. homes built before 1980, the weakness won't last. Eventually, homeowners will need to repair their roofs. Pent-up demand, and a big storm season, could be all it takes to make that happen.

A prime beneficiary will be Beacon Roofing Supply becn -3.368176538908246% Beacon Roofing Supply Inc. U.S.: Nasdaq USD24.96 -0.87 -3.368176538908246% /Date(1411765200144-0500)/ Volume (Delayed 15m) : 493548 AFTER HOURS USD24.96 % Volume (Delayed 15m) : 1933 P/E Ratio 21.517241379310345 Market Cap 1274658825.19928 Dividend Yield N/A Rev. per Employee 761580 More quote details and news becn in Your Value Your Change Short position , the second-largest roofing-products distributor in the country, with about 10% of the market. The largest is closely held ABC Supply. Beacon's shares (ticker: BECN) have slumped 35% this year, reflecting weak demand. At a recent $24.85, they look cheap, and could be primed for a rebound.

Trey Grooms, an analyst at Stephens, thinks improving demand could help lift earnings 38%, to $1.73, in fiscal 2015, which begins this week, on a 5% rise in revenue. Even at those levels, he notes, earnings are depressed, well below true earnings power of $2.50 to $3 a share.

As earnings head up, Beacon's shares could jump 40%, to $35.

BEACON TRACES ITS ROOTS to the Beacon Sales Co., a Massachusetts-based roofing distributor, founded in 1928. Starting around 1990, Beacon grew by rolling up smaller distributors. The company went public in 2004.

This is a consolidating industry. The five largest distributors dominate the roofing market, with 50% of the business. The rest is highly fragmented among small regional players.

Beacon operates 254 branches in 40 states and Canada. The company buys roofing products from big manufacturers, like Owens Corning, Johns Manville, and Mid-States Asphalt, and sells them to over 40,000 contractors, builders, and building owners.

Beacon carries products for both residential and nonresidential roofing, including asphalt shingles, wood shingles, and single-ply roofing, as well as complementary building products like vinyl siding, windows, and doors. Asphalt shingles are its single largest product.

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Beacon Roofing Could Rise 40%