Beacon Roofing Supply trades at $112.85 and has moved in lockstep with the market. Its shares have returned 17.9% over the last six months while the S&P 500 has gained 14.2%.
Is there a buying opportunity in Beacon Roofing Supply, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.We don't have much confidence in Beacon Roofing Supply. Here are three reasons why we avoid BECN and a stock we'd rather own.
Why Is Beacon Roofing Supply Not Exciting?
Established in 1928, Beacon Roofing Supply (NASDAQ:BECN) distributes residential and commercial roofing materials and complementary building products.
1. Slow Organic Growth Suggests Waning Demand In Core Business
We can better understand Building Material Distributors companies by analyzing their organic revenue. This metric gives visibility into Beacon Roofing Supply’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, Beacon Roofing Supply’s organic revenue averaged 4.5% year-on-year growth. This performance was underwhelming and suggests it may need to improve its products, pricing, or go-to-market strategy, which can add an extra layer of complexity to its operations. 
2. EPS Took a Dip Over the Last Two Years
Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.
Sadly for Beacon Roofing Supply, its EPS declined by 2.4% annually over the last two years while its revenue grew by 8.4%. This tells us the company became less profitable on a per-share basis as it expanded.
3. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Beacon Roofing Supply’s margin dropped by 3.2 percentage points over the last five years. If this trend continues, it could signal it’s becoming a more capital-intensive business. Beacon Roofing Supply’s free cash flow margin for the trailing 12 months was 2%.
Final Judgment
Beacon Roofing Supply’s business quality ultimately falls short of our standards. That said, the stock currently trades at 14.4x forward price-to-earnings (or $112.85 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better stocks to buy right now. We’d recommend looking at Costco, one of Charlie Munger’s all-time favorite businesses.
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