Beacon Roofing Supply, Inc. BECN is benefiting from solid demand in the residential housing market. Moreover, cost-saving efforts and productivity initiatives helped the company bring down operating expenses, thereby driving margins. Shares of Beacon Roofing have surged 80% in the past year compared with the Zacks Building Products – Retail industry’s 23.4% growth. However, rise in in input prices, weather-related challenges and stiff competition remain concern. Let’s delve deeper.

Factors Driving Growth

Cost-Saving Efforts: Beacon Roofing is moving forward with the integration of the Allied Building Products acquisition. Regarding the specific synergy components, Beacon Roofing began consolidating procurement programs to secure the best supply arrangement from vendors on a market-by-market basis. It is also progressing with its employee transitions process. The cost savings related to these decisions are just beginning to contribute to a reduction in operating costs.

During the last-reported quarter, the company’s gross margin improved 270 basis points (bps) and adjusted EBITDA margin expanded 380 bps year over year. Cost-saving efforts and productivity initiatives helped it bring down operating expenses, thereby driving margins. As a percentage of net sales, SG&A expenses contracted to 20.3% or 170 bps from a year ago. For fiscal 2021, the company expects adjusted EBITDA in the range of $560-$585 million for continuing operations, indicating a significant increase from $399 million pro-forma adjusted EBITDA in fiscal 2020.

Investments in Digital Platform & Product Enhancement: The Zacks Rank #3 (Hold) company is focused on investing for its employees with additional tools and training that is enhancing productivity for consistently expanding product breadth and depth, including TRI-BUILT private label offering. The company is also targeting new customer subsets, including building bonds with national accounts, large retailers and 2-step customers. The company will also gain from the successful execution of technology initiative in the growing e-commerce platform. The company’s digital platform achieved 10% of the company’s sales during fiscal 2020. It is on track with its long-term target of generating $1-billion annual digital sales. Given the lower cost to service, digital sales are generally accretive to gross margin. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Strategies Initiatives: Beacon Roofing has plans to divest the Interior Products business that is expected to strengthen balance sheet, enhance financial flexibility and sharpen focus on the core exteriors business. Notably, 80-85% of the company’s continuing business will be within residential and commercial roofing. Last year, the company undertook a strategic review decision. Under this, the company integrated 40 brands across the United States and Canada that sell exterior products under Beacon Building Products. The new name reflects its ability to supply customers with a broad range of residential and commercial building products, and a unique service offering across North America.

Driven by high concentration of non-discretionary repair and remodel demand, exteriors offer a unique platform for the company. It is focused on four key strategic initiatives — organic growth, digital, OTC (On-Time and Complete) and branch operating performance — that have been boosting sales and helping improve operating profitability. Markedly, the OTC Network is developed to support in-store and online customers with enhanced product availability, delivery tracking and notification. As of Dec 31, 2020, the company operated 58 distinct markets and more than 250 exteriors branches participating in OTC.

Strong R&R Demand: Of late, Beacon Roofing is observing increased demand for housing and repair and remodel activities amid COVID-related restrictions. Housing markets have been showing resilience of late, given low mortgage rates. With the opening of the economy, demand for housing and building material products is improving given the increasing trend of consumers to invest more in homes amid the pandemic. Revival of housing demand has been a boon for Beacon Roofing and other industry players like Builders FirstSource, Inc. BLDR, Fastenal Company FAST, Lowe’s Companies, Inc. LOW.

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As most of the company’s work is performed outdoor and is based on repair and remodeling activity, it is exposed to COVID-induced economic disruptions. Also, it has been witnessing higher input costs. Despite undertaking various cost-saving initiatives, the company continues to see inflationary pressure across most product categories.

Furthermore, the commercial roofing market has been experiencing heightened competitive pricing pressure of late. Moreover, even though repair remodel represents the majority product demand for Beacon Roofing, the timing of these replacement decisions can vary due to economic factors and weather conditions.

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