Beacon Roofing Up 24% Over a Month: Will the Rally Continue?

Beacon Roofing Supply, Inc. BECN, which belongs to the Zacks Building Products – Retail industry, has been performing pretty well of late. Its shares have gained more than 24% in the past month, outperforming the industry’s rally of 13.9%. The recent rally can be primarily be attributed to narrower year-over-year loss of the company in second-quarter fiscal 2020.

It witnessed improved results in fiscal second quarter on the back of strong sales (particularly until mid-March), stable margins and cost-control measures. Meanwhile, to deal with the recent economic issues arising from the COVID-19 pandemic, the company is looking for opportunities to improve productivity and enhance customer services through the industry-leading digital platform.

However, it is vulnerable to such economic environments as most of the work is performed outdoor, and based on repair and remodeling activity. About 70-75% of overall sales, and more than 80% of the roofing business is R&R based and largely non discretionary.

Stock Surges in May: Here’s Why

During second-quarter fiscal 2020, the company’s bottom line met the Zacks Consensus Estimate but improved from the prior-year quarter. Net sales also improved 2.1% year over year. Backed by certain contractor conversion initiatives, national account sales and continued support from the industry-leading digital platform, net sales surpassed analysts’ expectation despite comparatively lower hurricane-related demand.

The company — which shares space with BMC Stock Holdings, Inc. BMCH, Builders FirstSource, Inc. BLDR and GMS Inc. GMS in the same industry and currently carries a Zacks Rank #3 (Hold) — announced fixed cost-structure actions to reduce operating costs by $25 million. The initiatives were bought in focus to trigger overall growth and reduce debt. Of the said amount, it managed to reduce $4 million of operating costs in fourth-quarter fiscal 2019. Moreover, the integration of Allied Building Products and other acquisitions helped it gain synergies.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Beacon Roofing remains focused on investing in additional tools and training for its employees to enhance productivity for consistently expanding product breadth and depth. Also, the company is likely to gain from the successful execution of technology initiatives in the growing e-commerce platform.

In the current market situation, wherein customers and contractors are maintaining social distancing, the company has been banking on the industry-leading digital platform — Beacon Pro+ and Beacon 3D+. Contractors now want to order products on a 24/7 basis through Beacon Pro+ and many of them want to limit visits to the branch. Beacon 3D+ allows digital construction measurements to be taken without accessing the roof. Contractors can minimize interactions with homeowners during the bidding phase.

Major Threats to Beacon Roofing

Over the past year, the stock has declined 23.9% against the industry’s 29.1% growth. In addition to the recent market headwinds that are ailing almost every business across the globe, Beacon Roofing has been witnessing higher costs and expenses. During second-quarter fiscal 2020, it incurred adjusted loss of 27 cents per share. Also, its fiscal first-quarter adjusted earnings declined a whopping 46.7% on a year-over-year basis.

During the quarter, the company witnessed increased depreciation expenses, and high costs for fleet repairs, health care and customer-specific events. Also, rise in amortization expense, merit increases, higher health insurance costs, and volume-driven payroll increase impacted the company’s bottom line.

Beacon Roofing suspended its fiscal 2020 guidance due to COVID-19 impacts. The company witnessed significant disruptions post the declaration of the coronavirus outbreak as pandemic in mid-March.

It noted that the impact of COVID-19 was severe in 10 markets wherein infected cases were high. Sales in those markets declined 40-50% year over year in April. The other 46 markets served by the company recorded mid- to high-single-digit sales declines during April. Notably, these areas represent approximately 70% of its overall sales. In April, daily sales declined nearly 20% from the prior-year period.

Additionally, heightened competitive pricing pressure is concerning. The commercial roofing market has been experiencing extensive pricing pressures of late. Repair remodel activities, which represent the majority of product demand for Beacon Roofing, highly depend on economic factors and weather conditions.

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