Yahoo Finance Beacon (BECN) Stock Rises 24.4% YTD: What's Driving Growth?
Beacon Roofing Supply, Inc. BECN jumped more than 24% in the year-to-date period versus the Zacks Building Products - Retail industry’s 0.2% fall and the S&P 500 index’s 8.3% growth.
This largest publicly traded distributor of residential and non-residential roofing materials has been benefiting from restructuring initiatives, bolt-on acquisitions and technology enhancement efforts.
However, this Zacks Rank #3 (Hold) company has been witnessing persistent inflationary pressure and higher costs and expenses. Economic risks like volatile interest rates are also causes for concern.
Let’s delve deeper into the substantial driving factors.
Growth Drivers
Restructuring Moves Bode Well: Beacon is gaining from its focus on achieving its Ambition 2025 strategic plan. Ambition 2025 targets (announced on Feb 24, 2022) emphasize operational excellence, an above-market growth trajectory and accelerated stockholder value creation. The financial targets of Ambition 2025 assume that sales will reach $9 billion (8% CAGR) and $1 billion of EBITDA (10% CAGR), which would translate into 11% EBITDA margins (up 100 basis points from 2021).
It also focuses on four key strategic initiatives — organic growth, digital, OTC (On-Time and Complete) and branch operating performance. The company is focused on improving sales and operating performance at exterior and interior branches and intends to enhance the overall customer experience with increased scope and scale of business. Also, its OTC strategy leverages the density of its branch network and helps it serve customers more effectively and efficiently.
Robust Acquisitions to Boost Expansion: Beacon banks on a robust expansion spree via acquisitions. Since 2022, Beacon has made eight acquisitions. On Mar 31, the company announced the acquisition of two businesses, CA-based Al's Roofing Supply, Inc. and WI-based Prince Building Systems, LLC. On Jan 4, 2023, Beacon acquired First Coastal Exteriors, LLC, a distributor of complementary residential and commercial building products, including siding, gutter products and windows.
Focus on Digital Platform: The company is expanding its digital platform in value-added ways. In October 2022, the company launched a new Beacon Pro+ mobile application, custom-designed for iPhone and Android devices. This new digital platform has contributed to the growing digital sales of Beacon. During the first quarter, digital sales grew 11% year-over-year and achieved an all-time high in residential sales of more than 19% via digital platforms. The company will gain from the successful execution of technology initiatives on its growing e-commerce platform. Given lower service costs, digital sales are generally accretive to gross margin.
Potential Headwinds
High-Cost Inflation: Despite undertaking various cost-saving initiatives, the company continues to see inflationary pressures across most product categories. In first-quarter 2023, gross margin contracted 60 basis points (bps) and adjusted operating expenses increased 140 bps to 20.6% of sales. The increase was driven primarily by increased headcount, inflationary pressures and wages, fuel, and lease-related expenses such as rents, real estate taxes, utilities and maintenance costs, as well as higher incentive compensation. Adjusted EBITDA margin also contracted 180 bps year over year to 6.5%.
Economic Risks: As most of BECN’s work is performed outdoors and is based on repair and remodeling activity, it is vulnerable to various economic disruptions. About 70-75% of overall sales and more than 80% of the roofing business are R&R-based, as well as largely non-discretionary.
Also, the company heavily depends on new residential construction. The demand in the new residential construction market has been trending downward in the past few months, thanks to rising inflationary pressure and affordability issues. Federal government’s continuous interest rate hikes are the biggest concern for housing and related industries. For 2023, Beacon anticipates revenues from the new residential construction market to be down significantly. Non-residential market is anticipated to be flat due to low volumes and contracted destocking.
Key Picks
Some better-ranked stocks that investors may consider in the Zacks Retail-Wholesale sector are Chipotle Mexican Grill, Inc. CMG, Arcos Dorados Holdings Inc. ARCO and Chuy's Holdings, Inc. CHUY. CMG currently flaunts a Zacks Rank #1(Strong Buy), whereas ARCO and CHUY carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Chipotle has a long-term earnings growth rate of 31.8%.
The Zacks Consensus Estimate for CMG’s 2024 sales and EPS suggests growth of 12.4% and 19.7%, respectively, from the year-ago period’s levels.
Arcos Dorados has a long-term earnings growth rate of 9.5%.
The Zacks Consensus Estimate for ARCO’s 2023 sales implies an improvement of 16.6% from the year-ago period’s levels.
Chuy’s Holdings has a trailing four-quarter earnings surprise of 23.4%, on average.
The Zacks Consensus Estimate for CHUY’s 2023 sales and EPS indicates increases of 10.1% and 23.4%, respectively, from the year-ago period’s levels.
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Chipotle Mexican Grill, Inc. (CMG) : Free Stock Analysis Report
Beacon Roofing Supply, Inc. (BECN) : Free Stock Analysis Report
Chuy's Holdings, Inc. (CHUY) : Free Stock Analysis Report
Arcos Dorados Holdings Inc. (ARCO) : Free Stock Analysis Report
