Dull Fiscal 2010 at Beacon - Analyst Blog

Beacon Roofing Supply Inc. (BECN) delivered earnings per share (EPS) of 37 cents in its fourth quarter ended September 30, 2010, falling short of the Zacks Consensus Estimate of 41 cents and 42 cents reported in the year-ago quarter. The results were hurt by weak industry and economic conditions and a lower gross margin rate, partially offset by reduced expenses, including lower interest expense and income taxes. Further, the year-ago period delivered record earnings, benefiting from strong re-roofing activity in Hurricane Ike-affected regions.

Total revenue dipped 1% year over year to $482.6 million and failed to meet the Zacks Consensus Estimate of $496 million. Results were affected by weak industrial and economic conditions partly mitigated by accretions from recent acquisitions and a rebound in non-residential roofing and complementary product sales.

Non-residential roofing products recorded a sharp growth of 16.7% to reach $205.9 million while complementary building products, at $68.5 million of sales, posted a growth of 3.9%. Revenues from residential roofing products were a dampener, declining 15.1% to $208.2 million, affected by lower average selling prices in 2010 and less re-roofing activity in post storm-affected regions.The company, however, witnessed some gains in residential business in some of the regions that did not benefit from storms last year.

Cost & Margin Performance 

Cost of sales increased by a marginal 0.4% to $376.2 million in the quarter. Based on revenues, the same increased 120 basis points to 78%. Consequently, gross profit dropped 6% to $106.4 million and gross margin plunged 120 basis points to 22%.

Operating expenses dipped 1.2% to $75.6 million in the quarter and, based on revenues, remained flat at 15.7%. Operating income declined 16% to $30.8 million and operating margin contracted 110 basis points to 6.4%.

Fiscal 2010 Performance: A Snapshot

Beacon reported EPS of 75 cents, falling short of the Zacks Consensus Estimate of 82 cents and declining 35% from $1.15 in fiscal 2009. Fiscal 2010 revenue of $1,610 million lagged the Zacks Consensus Estimate of $1,623 million and dropped 7% from $1,734 million recorded in fiscal 2009. For fiscal 2010, non-residential roofing products posted a year-over-year growth of 3.7%, followed by a 3% increase in complementary building products while residential roofing products' revenue plunged 17%.

Financial Position

As of September 30, 2010, Beacon had cash and cash equivalents of $117.1 million, up from $82.1 million as of June 30, 2010. During fiscal 2010, cash flows from operations were $74.5 million, lower than $87.6 million in fiscal 2009. Cash flows were affected by lower net income and an increase in accounts receivable, partially offset by the benefits from a lower reduction in accounts payable and accrued expenses, a substantial decrease in inventories, and a decrease in prepaid expenses and other assets.

In fiscal 2010, the company expended $19.3 million toward acquisitions and paid down $15.2 million of debt. As of September 30, 2010, the debt-to-capitalization ratio improved marginally to 42% from 43% as of June 30, 2010.

Our Take

Since the fourth quarter of 2009, Beacon's revenues across its three major product lines have suffered declines due to a lackluster economy and lower levels of new construction and remodeling. However, during the latter half of fiscal 2010, the company has seen a turnaround in non-residential roofing sales and complementary products sales.

Residential roofing products sales, however, continue to remain sluggish. The last increase seen in sales was in the third quarter of fiscal 2009, which benefited from re-roofing activity in markets that were affected by Hurricane Ike. We believe, with a recovery in the U.S. economy, roofing activity will eventually improve.

Beacon currently has a Zacks #4 Rank (short-term Sell rating).

Beacon is one of the three largest roofing materials distributors in the United States and Canada, with more than 90% of sales coming from the U.S. Beacon sells roofing materials, asphalt shingles and single-ply roofing to both residential and non-residential markets. It also sells complementary building materials such as vinyl siding, doors, windows, insulation and waterproofing systems. Beacon competes with privately held American Builders & Contractors Supply Co Inc., Guardian Building Products Distribution Inc. and Stock Building Supply Inc.