Beacon Roofing Supply: Renovation Strong, Bidding Volumes Up
Summary
- Beacon Roofing Supply has seen strong performance in the construction markets, with bidding rates increasing sequentially as well as pricing and current volumes.
- Residential volume growth has remained strong, while non-residential volumes have decreased. Activity has been shifting to renovation.
- The company has experienced a boost in cash flows due to mitigated destocking trends and storm related demand from contractors.
- A good quarter. Evidence of resilience. But still not the best pick in current markets.
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Beacon Roofing Supply (NASDAQ:BECN) is a distributor of roofing and waterproofing products. Contrary to what many believed would happen in housing, the construction markets have remained pretty strong. There is some volume pressure in certain end markets, but a stormy beginning of the year and general resilience has kept things strong in BECN results, despite destocking. In fact, especially on volumes, BECN has continued to outperform the trends we were beginning to see as of our first coverage of the company, but has continued its resilience in residential as per our previous coverage in the Q1. Management even reports bidding volumes are up and growing sequentially. While the performance has been really good, especially on the inventory front which has been a concern across materials industries, in the global arena an 12x PE distributor is not an optimal pick when there are cheaper picks out there in more recession resistant and higher-moat businesses.
Q2 Breakdown
Let's go over some of the figures.
Sales Highlights (Q2 2023 Pres)
Volumes are down in non-resi, but not in residential, which is managing volume growth YoY. This is pretty remarkable considering the stocking that was going on in 2022. Storm season explains the strong results. While Q1 saw the tail end of the actual storms, it takes a while after the devastation for contractors to start buying from BECN for roofing works. The storm season actually established some re-stocking trends in a period where de-stocking is actually the main concern for growth. Non-resi didn't have these benefits.
The falls in inventory as contractors stock up for the next quarters of rebuilding boosted cash flows substantially. The storms have been a major tailwind, shown by the substantial double-digit increase in insurance claims for roof repairs.
Cash Flows (Q2 2023 Pres)
In addition to pricing growth across segments that have kept EBITDA relatively resilient, and also kept the gross margins at pretty good levels when looking at the longer-term trends, the bidding rates are still pretty high. While they'll likely be down in Q3 YoY, as well as other metrics like volume as Q3 was a strong comp as stocking up came into full swing, they are coming up sequentially so it looks like the backend of demand still is pretty strong.
Yes, so, hey, good set of questions, and you're absolutely right. I'm glad you brought it up. So the Q3 volumes are much more around last year's comp. It was an extremely strong comp on the non-Resi side in Q3 of last year. We're not seeing sequential degradation. As a matter of fact, it kind of gets less negative as you get through the months in the second half of the year. Bidding and quoting activity is actually up, kind of low double digits, so we feel good about that.
The project sizes are a little bit smaller, but we're seeing a lot of activity on the R&R side of non-Resi, so a little bit less on the new Res and a little bit more on the R&R
The other thing, also corroborated by other global building materials players, is the fact that renovation is the main driver right now of demand, not so much new construction.
Bottom Line
EBITDA is down. Labour shortages have been a concern, so the company has voluntarily overshot with hiring to meet potential demand. Moreover, the risks to the housing sector are not negligible. There are signs of slowdown, projects are getting smaller and there isn't as much new construction. While the Fed comments look favourable, there is no guarantee of a soft-landing and housing is among the most cyclical industries. Roofing is a relatively attractive market within the housing and building products market, but it is still also cyclical. 12x PE offers some earnings yield, but in the global universe of stocks there are still much better deals that we would favour in different markets - in businesses with better recession resistance and real moats. BECN is interesting as a barometer of the housing market and building products activity in the US, but it's not compelling enough for us.
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