2023-03-28 21:31:27 ET
Summary
- As one of the largest public companies, BECN has been in the business of the distribution of roofing materials and related services for over 90 years.
- Total net sales increased by close to 26% in 2022, with residential roofing products reporting 20% sales growth, and non-residential roofing products reporting close to 45% sales growth.
- If the new plan enhances sales, and successfully helps the company achieve positioning in new markets, FCF will likely trend north.
Beacon Roofing Supply, Inc ( BECN ) is reporting significant acquisitions in 2022 and 2023, and announced its Ambition 2025 plan. I believe that further developments of its OTC Network, more economies of scale, and new acquisitions could drive FCF north. I did identify some risks from lack of materials, failed acquisitions, or change in credit markets. However, I believe that BECN stock price remains undervalued.
Recent Impressive Sales Growth Driven By Inorganic Growth
As the largest public company in the distribution of roofing materials and related services, Beacon Roofing has been in business for over 90 years. Only in the year 2022, it participated in operations throughout the 50 states in the United States, through more than 480 branches of its property. Its activity also extends to Canadian territory. Currently, the company estimates that it has more than 100,000 residential and non-residential customers, to whom it offers high-quality products for roofs.
The main activity of this company is the distribution of materials for the realization of ceilings, destined to all types of establishments. Its clients are often construction companies, agencies, independent contractors, and to a lesser extent small builders, with whom it maintains relationships in some cases for more than two decades. In any case, none of the clients accounts for more than 1% of the company's net income year after year.
In my view, the success of this company's business model is to be positioned among manufacturers of roofing materials and construction companies or independent contractors, maintaining long-standing relationships with market leaders, and facilitating logistics and contact infrastructure between the parties. The diversification of both suppliers and clients is, in my opinion, an asset.
Considering the most recent sales growth reported in 2022, in my opinion, having a look at the company is a great idea. Total net sales increased by close to 26% in 2022, with residential roofing products reporting 20% sales growth, and non-residential roofing products reporting close to 45% sales growth. Inorganic growth explains most of the revenue growth .
Assets And Recent Acquisitions
The company reported cash worth $67.7 million and accounts receivable close to $1009.1 million. With sales close to $8 billion, I observed that the company gets paid, on average, after approximately 40 days. Inventories stand at $1322.9 million, and with prepaid expenses of $417.8 million, total current assets are equal to $2817.5 million. Total current assets are equal to more than 2x the total amount of current liabilities, so I would say that a liquidity issue does not seem to exist here.
Property and equipment was equal to $337 million with goodwill of $1916.3 million, intangibles worth $447.7 million, and operating lease right-of-use assets of $467.6 million. In sum, total assets were equal to $6 billion. The asset/liability ratio is equal to close to 2x, so the balance sheet, in my view, looks quite stable.
Source: Annual Report
With regards to the total amount of goodwill, it is worth noting that the company acquired Allied Building Products Corp. for $2.88 billion in 2018 and Roofing Supply Group, LLC for $1.17 billion in 2016. There is more. The number of businesses acquired in 2022 and 2023 is also quite impressive. According to the last annual report, the company reported close to six acquisitions in 2023 and 2022. Considering the expertise in the M&A markets, I believe that many financial advisors will appreciate the company.
Liabilities
The list of liabilities include accounts payable worth $821 million, and days payable outstanding are close to 46, significantly better than a few months ago. Most investors will, in my view, appreciate the following chart. Beacon is paying faster to providers .
Source: YCharts
Accrued expenses stood at $448 million with current portion of operating lease liabilities of $94.5 million and current portion of finance lease liabilities close to $16.1 million. Besides, the current portion of long-term debt/obligations stood at $10 million, and total current liabilities were equal to $1.389 million.
Additionally, with long-term debt close to $1606.4 million, operating lease liabilities worth $382.1 million, and finance lease liabilities close to $67 million, total liabilities were equal to $3.7 billion.
Source: Annual Report
The total amount of debt appears significant. With that, I believe that the recent decrease in the financial debt/EBITDA ratio may be appreciated by investors. Management successfully managed to report a financial debt/EBITDA ratio close to 2x. In my view, further increases in FCF and EBITDA will likely help seduce investors. In my view, there are many investors out there who may not buy shares because of the total amount of debt.
Source: YCharts
My Assumptions And Free Cash Flow Forecasts
I am quite optimistic about the Ambition 2025 plan recently announced by management. In my view, if the new plan enhances sales, and successfully helps the company achieve positioning in new markets, FCF will likely trend north.
Source: Quarterly Report Source: Quarterly Report
I also believe that Beacon has sufficient expertise to allocate quality investments either in the area of ??acquisitions or infrastructure. In my view, management knows well where and how to open new branches throughout the country. If the company successfully deepens the development of digital tools, expands the reach of the Beacon OTC Network , and optimizes the performance of each of its branches, business results will likely improve.
Source: Corporate Website
I also believe that Beacon will likely enjoy FCF margin enhancement thanks to economies of scale and the network capabilities. These competitive advantages were highlighted in the most recent quarterly report. I believe that they are critical for understanding recent success of Beacon.
Finally, I am optimistic about future innovation projects. The company has digital software and programs called Beacon Pro+ and 3D+ that it also makes available to its customers. The different functions of digital software and programs are tracking a project's inventory, placing an order, tracking material shipments, requesting a vehicle for the transfer of the same, and making digital simulations of the constructions among others. These functions are a large part of the totality of the Beacon Roofing service, since they make it easier for the client to carry out the projects as well as to establish an active network to put the builders in contact with their clients and distributors.
My forecasts include 2030 net income of $597 million with 2030 depreciation and amortization of $230 million and stock-based compensation close to $22 million. I also assumed changes in accounts receivable of close to -$786 million, inventories of $83 million, and prepaid expenses and other current assets of $29 million. Besides, with changes in accounts payable and accrued expenses of -$256 million, CFO would be close to $364 million.
Source: My Estimates
With WACC of 9% and cash of $67.7 million, I also included finance lease liabilities of $67 million, long-term debt of $1606.4 million, and borrowings under revolving lines of credit of 254.9 million. Finally, my results would include an equity valuation of $4.898 billion, a price of $76 per share, and an IRR of 4.82%.
Source: My Estimates
Competitors
Competition in the roofing materials distribution market is driven by both national companies and small distributors in each region, which makes competition intense and prices vary according to sales areas. In any case, Beacon and two other companies accounted for 50% of the distribution market in the last year, which demonstrates the company's position in this regard. I believe that at some point, the authorities may try to stop some inorganic growth initiatives of Beacon due to antitrust regulations.
Risks From Lack Of Supply Materials, Lack Of New Financing, Or Failed Acquisitions
A lack of access to certain materials, supply cuts, drastic price changes, or ongoing contract renegotiations may generate conflicts in the company's operations. As a result, I believe that the company will likely suffer FCF margin deteriorations.
It is also worth noting that goodwill impairments could significantly reduce the total amount of assets, and lead to stock demand reductions. Management executes a number of acquisitions every year. Some of them will likely not offer the synergies expected by management. Beacon offered a certain explanation in this regard.
At December 31, 2022, goodwill represented approximately 32% of our total assets. Goodwill is not amortized for financial reporting purposes and is subject to impairment testing at least annually using a fair-value based approach. The identification and measurement of goodwill impairment involves the estimation of the fair value of our reporting unit. Our accounting for impairment contains uncertainty because management must use judgment in determining appropriate assumptions to be used in the measurement of fair value. We determine the fair values of our reporting unit by using a qualitative approach. Source: Annual Report
I also believe that drastic changes in the credit market could affect the total amount of debt payable by Beacon. Besides, if the company cannot obtain new financing, future sales growth will likely decline as the number of acquisitions will likely decline.
If the financial institutions that have extended credit commitments to us are adversely affected by major disruptions in the capital and credit markets, they may become unable to fund borrowings under those credit commitments. This could have an adverse impact on our financial condition since we need to borrow funds at times for working capital, acquisitions, capital expenditures, and other corporate purposes. Source: Annual Report
Conclusion
Considering the Ambition 2025 plan recently announced and the recent decrease in the financial debt/EBITDA ratio, I believe that new acquisitions may be announced in 2023. Besides, with sufficient investments in technology, new branches, and economies of scale, I would expect FCF margins to creep up. I did identify certain risks from lack of materials, goodwill impairments, or changes in the credit markets. With that, in my view, the stock price could be worth a bit more in the market.
For further details see:
Beacon Roofing: New Ambition Strategy Could Trigger The Stock Price