Elk Story Not Over Yet

Implications: Elk happens to be in the position of being desired by two different companies.  One they planned for, and the other they did not.  One road leads to survival and a continuation of the brand, the other, well, probably not!

Analysis: This country for the past several months has been swimming in asphalt roofing shingles.  The Southeast, in particular, has months of inventory.  One reason for this is obviously the lack of the predicted hurricanes.  Another is the slowdown from 2 million starts, to roughly 1.45 million starts in housing of which a large majority is in the Southeast.  But wait, 75 percent of the business is reroof.  So what is the problem?  The answer is too many players trying to run flat out and counting on storms and new construction to keep everyone both profitable and with inventory turns.  Consolidation is the natural course.  But who can consolidate?  GAF, Owens Corning, and Certainteed are market leaders.  Tamko and IKO are family owned, and are unlikely to consider buying another manufacturer unless it is at highly distressed pricing.  That leaves Elk and Atlas Roofing.  The combining of these two, as the Carlyle deal would do, would probably put them in forth ahead of Tamko in production size.  And the deal makes sense since Elk has a great name in the marketplace with one step distribution and great plant line speed for their upgraded shingles.   Atlas has solid plants throughout the U.S. and are also good at felt and roll roofing production.  Both are commodities, but can be great as money makers.  But guess what?  BMCA(GAF) needs production to service its business.  One big customer, Home Depot, has a big appetite that continues to grow with their HD Supply business.  The problem for Elk is GAF needs neither the Elk Brand nor the Elk infrastructure.  It needs plants.  And these are the few left to go after.  I do not think BMCA will go away quietly.