Here’s why you should invest in Beacon Roofing Supply (BECN)

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Fiduciary management, an investment management company, has published its letter to investors “Small Cap Equity Fund” for the third quarter of 2021 – a copy of which can be found downloaded here. The FMI Small Cap portfolios gained around 0.6% in the September quarter, compared to declines of 4.36% for the Russell 2000 Index and 2.98% for the Russell 2000 Value Index. You can check out the top 5 holdings in the fund to get a feel for their top picks for 2021.

Fiduciary Management, in its letter to investors for the third quarter of 2021, mentioned Beacon Roofing Supply, Inc. (NASDAQ: BECN) and discussed his position on the company. Beacon Roofing Supply, Inc. is a distributor of commercial and residential roofing products based in Herndon, Virginia with a market capitalization of $ 3.7 billion. BECN has returned 32.87% year-to-date, while its 12-month returns are up 51.49%. The stock closed at $ 53.40 per share on October 18, 2021.

Here’s what Fiduciary Management has to say about Beacon Roofing Supply, Inc. in its Q3 2021 letter to investors:

tag is the largest publicly traded distributor (# 2 overall) of roofing materials and complementary building products in the United States and Canada. Beacon serves over 90,000 customers and offers 140,000 SKUs from over 400 branches in all 50 states (97% of sales) and 6 Canadian provinces (3% of sales). Beacon makes 1.7 million annual deliveries (within a two hour radius) using its fleet of specialized trucks. Since the sale of the Non-essential Interiors division (2021), their total turnover has amounted to 53% of residential coverage; 25% commercial roofing; and 22% complementary building products (siding, windows, specialty exterior building products, insulation and waterproofing systems).

Good deal

• Manufacturers and distributors operate in a rational and consolidated market, with the top three distributors accounting for 54% of a $ 28 billion industry (almost twice what they had a decade ago). • The industry is led by ABC Supply Co. Inc. (24% share), Beacon Roofing (20% share) and SRS (10% share), with the remaining 46% held by 1,500 small distributors. • It is estimated that about 80% of roof sales are replacement and that the US housing stock is now over 40 years old on average. Ninety-four percent of the demand for roofing repairs in the United States is considered non-discretionary. • With management focusing on organic growth and maintaining discipline, higher returns should follow. • Thanks to the divestiture of Interiors, the net debt / EBITDA ratio for the third quarter of fiscal 2021 fell to 2.4 times, providing financial flexibility and possibly the possibility of repurchasing shares and issuing dividends. • Beacon is a simple scale business, and roof distribution is unlikely to undergo major changes.

Evaluation

• Despite regained financial health and flexibility and strong fundamentals, Beacon stocks fell from $ 60 in May to $ 50 in August (-17%), and the stock is trading at a discount to its average over 10 years for the next twelve months P / E (11 times), enterprise value / EBITDA (9 times) and enterprise value / sales (0.85 times). With consistent execution, we believe it is possible for Beacon to trade at a premium over 10 year averages and north of 1x EV / sales. • If Beacon were to grow 4.5% and hit the bottom of its EBITDA margin target by fiscal 2026 (9% -11%) and be assigned a P / E ratio of 15, the return compound would be about 15%.

Management

• The new CEO Julian Francis has refocused the company on its main roofing / exterior activity (disposal of interiors and substantial reduction of balance sheet risks), and inwardly on the productivity of branches, improvement of margins, organic growth and realizing the benefits of scale. • Frank Lonegro, CFO, recently joined Beacon from CSX Corporation, where he was CFO and Executive Vice President.

Investment thesis

Beacon is a simple business fueled by largely non-cyclical and non-discretionary demand. As Beacon reached its stature in an industry that has consolidated considerably over the past decade, under the previous leadership they faced (1) difficult and expensive integration (2) costs of debt and of substantial interest and (3) a separate indoor activity. Under the leadership of their new CEO, they sold Interiors and are making progress on strategic initiatives. Strong industry fundamentals have led to a rapid restoration of financial flexibility and Beacon’s future now looks strong. While anticipating a sequential slowdown in growth (in part due to lower year-over-year storm activity) and lower margin, we believe that an increased focus on organic growth and structural improvement in the margin should help to re-accelerate future profits, especially since replacement demand is likely to benefit from the strong construction period of 2000-2006.

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Based on our calculations, Beacon Roofing Supply, Inc. (NASDAQ: BECN) failed to secure a spot in our list of 30 most popular stocks among hedge funds. BECN was in 20 hedge fund portfolios at the end of the first half of 2021, compared to 21 funds in the previous quarter. Beacon Roofing Supply, Inc. (NASDAQ: BECN) generated a return of -2.08% in the last 3 months.

The reputation of hedge funds as savvy investors has been tarnished over the past decade, as their hedged returns could not keep up with the unhedged returns of stock indices. Our research has shown that small cap hedge fund stock selection managed to beat the market by double digits every year between 1999 and 2016, but the margin for outperformance has shrunk in recent years. Nonetheless, we were still able to identify in advance a select group of hedge funds that have outperformed S&P 500 ETFs by 115 percentage points since March 2017 (see details here). We were also able to identify in advance a select group of hedge funds that underperformed the market by 10 percentage points per year between 2006 and 2017. Interestingly, the margin of underperformance of these stocks has increased in recent years. Investors who are long in the market and short on these stocks would have reported more than 27% per year between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.

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Disclosure: none. This article was originally published on Monkey initiate.


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