|Shares Out. (in M):||78||P/E||11.0||9.8|
|Market Cap (in $M):||2,494||P/FCF||10.4||8.9|
|Net Debt (in $M):||3,002||EBIT||523||554|
|TEV ($):||5,496||TEV/EBIT||9.1 (EV/EBITDA)||8.6 (EV/EBITDA)|
Recommendation: Initiate a long position in BECN at today’s price
Beacon shares are down 45% since the start of 2018 on poor weather and investor concern around the housing cycle. Both fears are misguided, however, as Beacon offers a highly stable business model with very capable management oversight. Today the market gives long-term investors the opportunity to buy a cycle-resilient, high ROIC compounder at 10x FCF. I see 75% upside from today’s price.
Beacon Roofing Supply is a $2.5B market cap distributor of roofing materials and other complementary building products. The company buys roofing products (e.g. shingles) from OEMs, and distributes those products to local roofing contractors and homebuilders through its network of 550 branches. Through a combination of organic growth and acquisitions, Beacon has grown EPS at a 14% CAGR since its 2004 IPO. BECN is the second largest distributor of roofing materials with approximately 20% market share amidst a fragmented market. Most of Beacon’s 46 acquisitions have been small regional mom & pop competitors, but BECN has recently done two larger deals, acquiring RSG for $1.2B from PE sponsor CD&R in 2015, and acquiring Allied Building Products for $2.6B from CRH in 2017.
Roofing distribution is an excellent business at scale
Beacon has been unfairly dragged down by the rest of the housing sector
Fact pattern and track record of BECN insiders gives a high degree of confidence in execution
1. Roofing distribution is an excellent business at scale
Investors might be surprised to learn that distributing roofing products is a great business. The uninitiated may assume the business lacks barriers to entry, earns low ROICs, and is highly exposed to the housing cycle. In fact the BECN business model provides consistently high ROICs, profitable growth, and stable end-market demand.
Price insenstive customers: Most of BECN’s customer base is relatively unsophisticated mom & pop roofing contractors. For these roofers, gross margins on any given job are quite high at 35%, but operating profit varies widely (0% - 25%) with the industry average at just 6%. The name of the game is volume. I estimate the average roofer can increase EBIT by 28% with just a 7% increase in jobs.