Roofing materials distributor Beacon Roofing Supply (NASDAQ:BECN) met Wall Street’s revenue expectations in Q3 CY2024, with sales up 7.3% year on year to $2.77 billion. Its GAAP profit of $2.30 per share was 10.7% below analysts’ consensus estimates.

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“Beacon’s third quarter results demonstrated the resilience of our business model and the team’s strong execution on our Ambition 2025 initiatives,” said Julian Francis, Beacon’s President & CEO.

Company Overview

Established in 1928, Beacon Roofing Supply (NASDAQ:BECN) distributes residential and commercial roofing materials and complementary building products.

Building Material Distributors

Supply chain and inventory management are themes that grew in focus after COVID wreaked havoc on the global movement of raw materials and components. Building materials distributors that boast reliable selection and quickly deliver products to customers can benefit from this theme. While e-commerce hasn’t disrupted industrial distribution as much as consumer retail, it is forcing investment in digital capabilities to communicate with and serve customers everywhere. Additionally, building materials distributors are at the whim of economic cycles that impact the capital spending and construction projects that can juice demand.

Sales Growth

Reviewing a company’s long-term performance can reveal insights into its business quality. Any business can have short-term success, but a top-tier one sustains growth for years. Over the last five years, Beacon Roofing Supply grew its sales at a mediocre 6.3% compounded annual growth rate. This shows it couldn’t expand in any major way, a tough starting point for our analysis.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Beacon Roofing Supply’s annualized revenue growth of 8.4% over the last two years is above its five-year trend, suggesting some bright spots.

This quarter, Beacon Roofing Supply grew its revenue by 7.3% year on year, and its $2.77 billion of revenue was in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 3.8% over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and indicates the market believes its products and services will see some demand headwinds.

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Operating Margin

Beacon Roofing Supply was profitable over the last five years but held back by its large cost base. Its average operating margin of 6.4% was weak for an industrials business. This result isn’t too surprising given its low gross margin as a starting point.

On the plus side, Beacon Roofing Supply’s annual operating margin rose by 6.3 percentage points over the last five years.

In Q3, Beacon Roofing Supply generated an operating profit margin of 8.9%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Earnings Per Share

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth was profitable.

Beacon Roofing Supply’s full-year EPS flipped from negative to positive over the last five years. This is encouraging and shows it’s at a critical moment in its life.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

Beacon Roofing Supply’s EPS grew at a weak 3.6% compounded annual growth rate over the last two years, lower than its 8.4% annualized revenue growth. However, its operating margin didn’t change during this timeframe, telling us that non-fundamental factors affected its ultimate earnings.

In Q3, Beacon Roofing Supply reported EPS at $2.30, down from $2.52 in the same quarter last year. This print missed analysts’ estimates, but we care more about long-term EPS growth than short-term movements. Over the next 12 months, Wall Street expects Beacon Roofing Supply’s full-year EPS of $5.84 to grow by 13.6%.

Key Takeaways from Beacon Roofing Supply’s Q3 Results

We struggled to find many strong positives in these results. Its EPS missed and its EBITDA fell short of Wall Street’s estimates. Overall, this was a softer quarter. The stock remained flat at $95.47 immediately after reporting.

Should you buy the stock or not? We think that the latest quarter is only one piece of the longer-term business quality puzzle. Quality, when combined with valuation, can help determine if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free.