Beacon Roofing off the floor
If there is such a thing as a sweet spot in this economy, the clients of Beacon Roofing Supply Inc. are nowhere near it.
The Peabody company depends on construction contractors, many of whom build new houses and replace aging roofs on homes. Some customers work on commercial buildings.
In a weak economy hamstrung by a horrible real estate market, Beacon Roofing seems like a business in the wrong place at the wrong time. Did I mention that the company's principal products are petroleum-based, and prices are going up, up, up?
All true. So is this: Beacon Roofing's stock has been climbing steadily all year, improbably gaining more than 40 percent so far in 2008.
Calculate this year's 10 best-performing Massachusetts stocks, based on percentage of appreciation, and you would produce a list dominated by small drug companies and alternative energy businesses. Beacon Roofing is there too, ranked seventh. But only two companies on that short list, Vertex Pharmaceuticals Inc. and Momenta Pharmaceuticals Inc., generated more actual dollars of stock appreciation.
Of course, there are catches to Beacon Roofing's stock story. The shares are rebounding from a nasty fall that started from a heady peak back in 2005. Measure Beacon Roofing's performance over the past 12 months and the shares are down 30 percent.
The stock has performed worse than retailers like Home Depot Inc. but much better than the big, publicly traded home builders. Beacon Roofing shares reached a high of more than $27 three years ago and fell below $8 at the start of this year.
But the stock seemed to have found a bottom and continued to move higher despite weaker than expected financial results in its most recent quarter, finishing yesterday at $11.91. An improving view of the future is pushing the stock up.
"We were probably too high at $27, but we were definitely too low at $8," says chief financial officer David Grace.
Analyst Brent Rakers of Morgan Keegan & Co. upgraded his rating on Beacon Roofing shares to "outperform" last month. Rakers said he liked the stock, despite the tepid quarterly results and reservations about any coming upturn in housing or home improvement.
Last week, Piper Jaffray analyst Michael Cox added Beacon Roofing to his firm's "alpha list," a designation that means he believed the stock could move significantly higher soon.
Bullish analysts like Rakers and Cox are rooting for some strange developments to help push Beacon Roofing shares higher.
They are encouraged by the prospects for product inflation and are keeping their fingers crossed for some really nasty weather. Tornados and hurricanes are what they have in mind.
Cox says a Piper Jaffray survey of contractors convinced him that Beacon Roofing is able to pass higher costs on to its customers and maintain profit margins. Rakers says the company's business "should continue to benefit from favorable inflation trends." He expects a short-term boost because Beacon Roofing bought some supplies early, before the latest price increases.
As sinister as it sounds to anticipate serious storms, weather is a big factor in the roofing supply business.
Last year's weather did less damage than on average and the hurricane season was unusually quiet. Analysts think storms are likely to generate more roofing business in 2008, improving year-to-year comparisons.
It could take a very long time for Beacon Roofing shares to come close to their old highs again. But they have bounced off the bottom with a plausible story for growing in the near future.
That qualifies as a rare bright spot in the construction business.
The Red Herring
Robert Mahoney, executive vice chairman of Citizens Financial Group, is expected to retire at the end of the month. The longtime Boston banker, who came to Citizens in 1993, told bank staff Friday of his plans to step down.
Mahoney is among the last of the senior executives who made up the inner circle of retired Citizens chief executive Larry Fish to leave the bank.
Steven Syre is a Globe columnist. He can be reached at syre@globe.com.
