Should You Dump Beacon Roofing on Soft Residential Demand? – Analyst Blog

On Nov 19, 2014, we issued an updated research report on Beacon Roofing Supply, Inc. ( BECN ). Though the roofing material distributor has successfully expanded its business through strategic acquisitions and diversification of its product offering, its performance might be affected by softer residential demand, difficult pricing environment and volatile exchange rates.

Notably, Beacon Roofing's third-quarter of 2014 earnings were impacted by lower gross margins from reduced selling prices due to weak demand and a continued unfavorable shift in sales mix to lower margin direct shipment and commercial business. This trend is expected to continue through the rest of 2014.

The residential market will remain difficult amid soft volumes and price deflation, consequently affecting Beacon Roofing's performance. Hence, the company lowered its 2014 revenue growth guidance to 4-5% from 5-8%.

Nonetheless, Beacon Roofing's acquisition of Wholesale Roofing Supply (WRS), Applicators Sales & Service (Applicators) and All Weather Products Ltd. (AWP) will aid growth. However, higher construction costs, labor shortage, lack of funds for real estate projects and adverse effects of sequestration will affect the non-residential construction sector and in turn hurt the company's performance.

Further, Beacon Roofing belongs to a highly competitive industry. The maintenance, repair, & operations (MRO) supply market is highly fragmented with many smaller local players competing directly on price. Moreover, general market softness, volatile exchange rates and uncertainty regarding weather conditions remain matters of concern.

Furthermore, the estimates for Beacon Roofing moved downward in the past 90 days. The Zacks Consensus Estimate for 2014 decreased 2.4% to $1.22 per share and for 2015 the same reduced 3.6% to $1.62 per share. Beacon Roofing has also underperformed the Zacks Consensus Estimate in each of the four trailing quarters with an average negative surprise of 87.87%.

Beacon Roofing currently carries a Zacks Rank #4 (Sell).

Other Stocks to Consider

Some better-ranked stocks in the same industry include Boise Cascade Company ( BCC ), Hovnanian Enterprises Inc. ( HOV ) and O'Reilly Automotive Inc. ( ORLY ). While Boise Cascade and Hovnanian carry a Zacks Rank #1 (Strong Buy), O'Reilly holds a Zacks Rank #2 (Buy).

O REILLY AUTO (ORLY): Free Stock Analysis Report

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Should You Dump Beacon Roofing on Soft Residential Demand? - Analyst Blog