Shorting BECN - Beacon Roofing Supply, Inc.

Beacon Roofing Supply: Description

Beacon Roofing Supply (BECN) is a distributor of residential and non-residential roofing materials in the United States and Canada. The company also distributes other building materials, including siding, windows, lumber products and waterproofing systems, for building exteriors.

What Does Beacon Do?

Beacon earns a lot of its revenue by repairing roofs that have been damaged in storms. Currently, most of Beacon's profits are coming from repairs of existing roofs, as opposed to installing new roofs. The recession has created a serious dent in the roofing business, and our bears feel like this prevents a shorting opportunity.

The Bears: Declining Sales, Narrowing Margins, and Debt

Declining sales, narrowing margins, and lots of debt. AR is increasing disproportionately to NI. But what's worse, is that management keeps "hyping" the stock with statements about increased demand for their roofs.

They had a recent earnings quarter (4th quarter, 2008) that exceeded expectations, but this was primarily attributed to the pass-through of manufacturer price increases in residential shingles, and re-roofing in storm affected areas.

A tightening cash position coupled with mounting debt will prove fatal in an environment where building materials won't be needed on the same scale for at least a couple more years.

The Bulls: Undervalued, Competitive Advantage

Beacon is currently undervalued considering its position in the industry. The 4th quarter results of 2008 greatly exceeded analyst expectations, and their focus and exposure on the re-roofing industry (as opposed to building new roofs) should limit downside in a recessionary environment. Some analysts say the reroofing market is projected to be twice the size of the new roofing market.