2023-11-15 04:42:17 ET
Summary
- Beacon Roofing Supply announces decent Q3 FY23 results with a rise in net sales and net income.
- The company's growth in tough market conditions and strategic acquisitions make it a reliable option.
- BECN's technical chart suggests a bullish trend and potential for strong returns, making it an attractive investment opportunity.
Beacon Roofing Supply ( BECN ) distributes roofing materials and offers repair services. BECN recently announced decent Q3 FY23 results amidst tough market conditions. Its growth, valuation, and price action suggest that it can be rewarding in the coming times. Hence, I assign a buy rating on BECN stock.
Financial Analysis
BECN recently announced its Q3 FY23 results . The net sales for Q3 FY23 were $2.5 billion, a rise of 7% compared to Q3 FY22. The major reasons behind the sales growth were increased residential roofing and complementary products. The sales of residential roofing and complementary products increased by 13.6% and 12.7% in Q3 FY23 compared to Q3 FY22. The residential roofing benefited from higher pricing and increased volumes. The complementary products increased mainly due to the company’s Coastal Construction acquisition, which it acquired in November 2022. The acquisition boosted its waterproofing products. Its gross margin for Q3 FY23 was 26%, which was 26.1% in Q3 FY22. The slight decline in gross margin was due to increased product costs, especially in the non-residential business.
The net income for Q3 FY23 was $161.3 million, a rise of 4.2% compared to Q3 FY22. The year 2023 has been one of the worst years for the housing market in North America. The rising interest and mortgage rates led to a housing crisis in North America. Most of the companies that are in the housing market have struggled in 2023. However, if we look at BECN’s numbers till now in FY23, we can see that it has constantly shown growth compared to previous financial years, which is quite impressive, and it shows that it is somewhat immune to economic downturns. Its ability to show growth in tough times makes it dependable, and I believe the reason for its strong performance in tough times is the nature of its business. They provide repair and new weatherproofing products, which is a necessity, and the consumers are going to opt for it despite adverse market conditions. However, I agree that the housing crisis has slowed its growth due to less construction activity. But despite this headwind, the positive growth proves that BECN is a reliable option at a time of uncertainty. Additionally, acquisitions have been one of its major strategies to boost the company’s growth, and its previous acquisition, coastal construction, has proven beneficial for them. Continuing this strategy, it acquired Garvin Construction, which will increase its presence in the Northeast. In addition, there is one more positive for the company: recently, the mortgage rates in the U.S. saw a drop. Although it is still way above the historical average, it is still down from the sky-high rates, and the company has delivered strong results during sky-high rates. So the recent drop will certainly help them improve its performance in the coming times.
Technical Analysis
BECN is trading at $75.3. The chart of BECN looks picture-perfect, and it is one of my favorite setups to trade. The stock gave a breakout after a consolidation of two years, and after breaking the $68 level in June 2023, the price went up by 27% in less than two months. But I always prefer and advise not to trade on breakouts as it can be risky sometimes. I advise to trade on retest or at pullbacks, and the setup here is perfect because it is less risky and more rewarding. After moving up 27%, the stock went into a slight correction, and after reaching near the breakout level of $68, the stock formed a solid green candle. So, the retest of the breakout level has been done, and buyers who missed buying it at the time of the breakout will enter here. So, in my opinion, this might be the right time to invest in it as its chart is quite bullish, and the stock price might look for a new all-time high in the coming times.
Should One Invest In BECN?
The stock price has been correcting since July despite performing well, and I believe the housing market crisis was one of the major reasons behind it. However, the recent drop in mortgage rates and the retest of the breakout level provide new buyers with a solid opportunity because I believe it has the potential to deliver strong returns in the coming times. In addition, if we look at its valuation, we can see that it is undervalued. BECN has a P/E [FWD] ratio of 10.36x, its five-year average is around 12.05x, and the sector median is around 16.92x. Looking at its growth in times of adverse market conditions, I think it should trade at a higher multiple. If we take its five average of 12.05x and EPS [FWD] of $7.33, we get a share price of $88. It gives us an upside of 16% from the current level. So, considering its cheap valuation, perfect technical setup, and strong results, I assign a buy rating on BECN.
Risk
They sell items for both residential and commercial buildings, making up a percentage of their inventory. The health of the US economy and mortgage markets, as well as the availability of credit and capital, interest rates, foreclosure rates, housing inventory, occupancy levels, consumer confidence, employment levels, and changes in tax laws, all affect the strength of these markets. New housing starts and business investment are also dependent on these factors. Since many of their costs are fixed, economic downturns in the areas and markets they service could lead to fewer net sales and, consequently, lower profitability. Unfavorable shifts in the housing market, credit markets, consumer confidence, affordability, inventory levels, and occupancy, as well as a downturn in the US economy or any local or regional economy in which they operate, could have a negative impact on consumer spending, which would lower demand for their products and hurt their business. Furthermore, a decline in business investment or the construction of new homes could be brought on by economic and financial market volatility, particularly that which arises from political or social disturbance. This would be detrimental to their company.
Bottom Line
I believe BECN can be rewarding in the coming times. It has performed well in adverse market conditions, and the valuation seems attractive. In addition, its technical chart looks perfect. Hence, I assign a buy rating on BECN.
For further details see:
Beacon Roofing Supply: Undervalued Company That Can Be Rewarding