Why Is Beacon Roofing (BECN) Up 10.1% Since the Last Earnings Report? – December 21, 2017

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It has been about a month since the last earnings report for Beacon Roofing Supply, Inc. (BECN Free Report) . Shares have added about 10.1% in that time frame, outperforming the market.

Will the recent positive trend continue leading up to the stock’s next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted of late, let’s take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Beacon Roofing Q4 Earnings Lag, Initiates ’18 View

Beacon Roofing reported adjusted earnings of 93 cents per share for fourth-quarter fiscal 2017, falling behind the Zacks Consensus Estimate of 94 cents. Earnings increased 6% on a year-over-year basis, driven by strong sales growth within each of the three product lines — residential roofing, non-residential roofing and complementary products. It was further aided by strong organic sales trends across the majority of geographies. However, higher operating expenses acted as a dampener on the margins.

Including acquisition-related items, the company reported a profit of 73 cents per share in the quarter compared with 78 cents in the prior-year quarter.

Operational Update

This distributor of residential and non-residential roofing materials posted record sales of $1.29 billion, exhibiting a 9.8% year-over-year rise. This also marked the fifth consecutive quarter of sales exceeding $1 billion. Revenues also beat the Zacks Consensus Estimate of $1.26 billion.

Residential roofing product sales increased 9.3%, delivering its 14th consecutive quarter of sales growth. Non-residential roofing product sales registered a rise of 5.3% and complementary product sales were up 20.7%. Existing markets same day sales, excluding acquisitions, increased 8.2% for the quarter.

Cost of goods sold increased 11% to $967 million. Gross profit was $322.6 million, up 7% from $302 million in the year-ago quarter. Gross margin contracted 70 basis points (bps) to 25%.

Operating expenses for the quarter increased 14% year over year to $235 million. Higher operating expense was driven by variable cost tied to the stronger expected sales and gross margins. Further, escalating diesel cost led to the increase in operating expenses. Operating income in the quarter was $87.3 million, a 9% drop from $95.9 million in the prior-year quarter due to higher operating expenses. Operating margin contracted 140 bps to 6.8% in the reported quarter.

Cash Position

Beacon Roofing reported cash and cash equivalents of $138 million as of Sep 30, 2017, compared with $31.4 million as of Sep 30, 2016. The company generated $315 million in cash from operating activities in fiscal 2017, compared with $120.6 million in the prior fiscal.

Acquisitions

Beacon Roofing completed five acquisitions for a combined sales run rate greater than $130 million during fiscal 2017. These buyouts will be accretive to margins and also improve its geographic penetration and product portfolios across the United States. The company has also announced the acquisition of CRH plc’s U.S. distribution business, Allied Building Products Corp. for $2.625 billion in cash. The acquisition is expected to close in early January. The buyout will not only expand product offerings, but also increase geographical reach in both existing and new markets. Further, it will lead to significant cost synergies.

Fiscal 2017 Performance

Beacon Roofing reported adjusted earnings of $2.18 per share in fiscal 2017 which improved 6% year over year but lagged the Zacks Consensus Estimate of $2.19. Including one-time items, the company reported earnings per share of $1.64 compared with $1.49 in the prior fiscal. Sales for fiscal 2017 were at $4.38 billion, up 6% year over year and ahead of the Zacks Consensus Estimate of $4.35. Both revenues and earnings per share marked annual record performances for the company.

2018 Outlook

For fiscal 2018, the company projects total sales in the range of $6.6-$6.9 billion, adjusted EBITDA of $560-$600 million, and adjusted earnings per between $2.95 and $3.25. This includes a nine month contribution from Allied Building Products.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed an upward trend in fresh estimates. There have been six revisions higher for the current quarter compared to one lower. While looking back an additional 30 days, we can see even more upward momentum. There have been eight moves up in the last two months.

VGM Scores

At this time, Beacon Roofing’s stock has a great Growth Score of A, though it is lagging a lot on the momentum front with a C. The stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren’t focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is primarily suitable for growth investors while also being suitable for those looking for value and to a lesser degree momentum.

Outlook

Estimates have been trending upward for the stock. The magnitude of these revisions also looks promising. It comes with little surprise that the stock has a Zacks Rank #1 (Strong Buy). We expect above average returns from the stock in the next few months.

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