For beginners, it can seem like a good idea (and an exciting prospect) to buy a company that tells a good story to investors, even if it currently lacks a track record of revenue and profit. But as Peter Lynch said in One Up On Wall Street, ‘Long shots almost never pay off.’ While a well funded company may sustain losses for years, it will need to generate a profit eventually, or else investors will move on and the company will wither away.
So if this idea of high risk and high reward doesn’t suit, you might be more interested in profitable, growing companies, like Beacon Roofing Supply (NASDAQ:BECN). While this doesn’t necessarily speak to whether it’s undervalued, the profitability of the business is enough to warrant some appreciation – especially if its growing.
In the last three years Beacon Roofing Supply’s earnings per share took off; so much so that it’s a bit disingenuous to use these figures to try and deduce long term estimates. Thus, it makes sense to focus on more recent growth rates, instead. Impressively, Beacon Roofing Supply’s EPS catapulted from US$2.83 to US$6.19, over the last year. Year on year growth of 119% is certainly a sight to behold. Shareholders will be hopeful that this is a sign of the company reaching an inflection point.
One way to double-check a company’s growth is to look at how its revenue, and earnings before interest and tax (EBIT) margins are changing. While we note Beacon Roofing Supply achieved similar EBIT margins to last year, revenue grew by a solid 27% to US$8.4b. That’s a real positive.
In the chart below, you can see how the company has grown earnings and revenue, over time. For finer detail, click on the image.
You don’t drive with your eyes on the rear-view mirror, so you might be more interested in this free report showing analyst forecasts for Beacon Roofing Supply’s future profits.
It’s said that there’s no smoke without fire. For investors, insider buying is often the smoke that indicates which stocks could set the market alight. Because often, the purchase of stock is a sign that the buyer views it as undervalued. However, small purchases are not always indicative of conviction, and insiders don’t always get it right.
Insider selling of Beacon Roofing Supply shares was insignificant compared to the one buyer, over the last twelve months. Namely, company insider Martin Harrell out-laid US$500k for shares, at about US$55.50 per share. It’s hard to ignore news like that.
Along with the insider buying, another encouraging sign for Beacon Roofing Supply is that insiders, as a group, have a considerable shareholding. Indeed, they hold US$17m worth of its stock. That’s a lot of money, and no small incentive to work hard. While their ownership only accounts for 0.5%, this is still a considerable amount at stake to encourage the business to maintain a strategy that will deliver value to shareholders.
While insiders already own a significant amount of shares, and they have been buying more, the good news for ordinary shareholders does not stop there. That’s because Beacon Roofing Supply’s CEO, Julian Francis, is paid at a relatively modest level when compared to other CEOs for companies of this size. The median total compensation for CEOs of companies similar in size to Beacon Roofing Supply, with market caps between US$2.0b and US$6.4b, is around US$6.6m.
Beacon Roofing Supply offered total compensation worth US$5.7m to its CEO in the year to September 2021. That is actually below the median for CEO’s of similarly sized companies. CEO compensation is hardly the most important aspect of a company to consider, but when it’s reasonable, that gives a little more confidence that leadership are looking out for shareholder interests. Generally, arguments can be made that reasonable pay levels attest to good decision-making.
Does Beacon Roofing Supply Deserve A Spot On Your Watchlist?
Beacon Roofing Supply’s earnings per share have been soaring, with growth rates sky high. The icing on the cake is that insiders own a large chunk of the company and one has even been buying more shares. This quick rundown suggests that the business may be of good quality, and also at an inflection point, so maybe Beacon Roofing Supply deserves timely attention. It is worth noting though that we have found 2 warning signs for Beacon Roofing Supply that you need to take into consideration.
The good news is that Beacon Roofing Supply is not the only growth stock with insider buying. Here’s a list of them… with insider buying in the last three months!
Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.
What are the risks and opportunities for Beacon Roofing Supply?
Trading at 34.5% below our estimate of its fair value
Earnings grew by 104.2% over the past year
Earnings are forecast to decline by an average of 0.6% per year for the next 3 years
Debt is not well covered by operating cash flow
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.