breezemaker
Beacon roof supply (NASDAQ:BECN) distributes roofing materials and offers repair services. BECN recently reported good results for the third quarter of last year amid difficult market conditions. Its growth, valuation and price action suggest it could be rewarding in the near future. Therefore, I schedule a purchase rating on BECN shares.
Financial analysis
BECN recently announced Q3 FY23 results. Net sales for the third quarter of FY23 were $2.5 billion, an increase of 7% compared to the third quarter of FY22. The main reasons behind the increase in sales were the growth of residential roofing and complementary products. Sales of residential roofing and ancillary products increased by 13.6% and 12.7% in Q3 FY23 compared to Q3 FY22. Housing cover benefited from higher prices and increased volumes. Complementary products increased mainly due to the acquisition of Coast Construction, which it acquired in November 2022. The acquisition increased its waterproofing products. Its gross margin for Q3 FY23 was 26%, which was 26.1% in Q3 VV22. The slight decline in gross margin was due to the increase in product costs, especially in the non-residential business.
Looking for Alpha
Net income for Q3 FY23 was $161.3 million, an increase of 4.2% compared to Q3 FY22. 2023 has been one of the worst years for the housing market in North America. 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 figures so far in FY23, we can see that it has shown continuous growth compared to previous financial years, which which is quite impressive, and shows that it is somewhat immune to economic downturns. Its ability to show growth in difficult times makes it reliable and I believe the reason for its strong performance in difficult times is the nature of its business. They offer new repair and weatherproofing products, which is a must and consumers will choose 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 in a time of uncertainty. Furthermore, acquisitions have been one of its key strategies to drive the company’s growth, and its previous acquisition, Coastal Construction, has proved beneficial for them. In continuation of this strategy, it acquired Garvin Construction, which will increase its presence in the Northeast. In addition, there is another positive for the company: recently, mortgages NORMS in the US there was a decline. Although still well above the historical average, it is still down from very high rates and the company has delivered strong results during high rates. So, the recent drop will surely help them to improve its performance in the coming times.
Technical Analysis
Commercial view
BECN is trading at $75.3. The BECN chart looks perfect, and is one of my favorite setups for trading. The stock exploded after a two-year consolidation, and after breaking the $68 level in June 2023, the price rose 27% in less than two months. But I always prefer and advise not to trade in breakouts as it can be risky at times. I advise trading on retests or pullbacks, and the setup here is perfect because it’s less risky and more rewarding. After rising 27%, the stock went into a slight correction and after reaching near the exit level of $68, the stock formed a strong green candle. So the retesting of the split level is done and buyers who didn’t buy it at the time of the split will enter here. So in my opinion, this may be the right time to invest in it as its chart is quite good and the stock price may seek a new all-time high in the coming times.
Should one invest in BECN?
The share price has corrected since July despite the good performance, and I believe the housing market crisis was one of the main reasons behind it. However, the recent fall in mortgage rates and the retesting of the level of sharing offer new buyers a solid opportunity, as I believe it has the potential to deliver strong returns in the coming times. In addition, if we look at his rating, we can see that he is underrated. BECN has one P/E [FWD] ratio of 10.36x, its five-year average is around 12.05x and the sector average is around 16.92x. Seeing its growth in times of adverse market conditions, I think it should be trading at a higher multiple. If we take his average five of 12.05x and EPS [FWD] of $7.33, we get a share price of $88. It gives us a 16% increase from the current level. So, considering its cheap valuation, perfect technical setup and strong results, I assign a buy rating to BECN.
The danger
They sell both residential and commercial items, making up a percentage of their inventory. The health of the U.S. 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 power of these markets. New housing starts and business investments also depend on these factors. Since many of their costs are fixed, economic downturns in the areas and markets they serve can lead to fewer net sales and, therefore, lower profitability. Adverse changes in the housing market, credit markets, consumer confidence, affordability, inventory levels and occupancy, as well as a downturn in the U.S. economy or any local or regional economy in which they operate, could have a negative impact on consumer spending. which would reduce demand for their products and hurt their business. Additionally, a decline in business investment or new home construction can be caused by economic and financial market volatility, particularly that resulting from political or social unrest. This would be detrimental to their company.
end
I believe BECN can be rewarding in times to come. It has performed well in adverse market conditions and the valuation looks attractive. Moreover, its technical chart looks perfect. Therefore, I assign a Buy rating to BECN.
