FSS - Federal Signal rises on upgrade to Buy rating at D.A. Davidson

Federal Signal ( NYSE: FSS ) on Friday rose 1.9% after analysts at investment bank D.A. Davidson raised their ratings on the machinery company to Buy from Neutral. Government spending on public safety and road maintenance is likely to remain strong even during an economic slowdown, supporting earnings growth for the company, the bank said.

Federal Signal, whose equipment brands include Elgin, Vactor and Guzzler, has the potential for gains as $175 billion from the American Rescue Plan Act of 2021 is released this year for state and local spending and must be allocated by the end of 2024. In addition, $550 billion from last year’s bipartisan infrastructure bill must be spent by late 2026. Police spending also is supportive for one of Federal Signal's business segments.

A key concern is whether Federal Signal is among the machinery companies that will be able to maintain higher prices for their products as the cost of raw materials declines.

Federal Signal “can envision price negotiations taking place from time to time, but broad, reversible surcharges were never a part of the company's strategy,” Michael Shlisky, analyst at D.A. Davidson, said in the Oct. 7 report. The company “has met the high end or beat its 12%-16% consolidated EBITDA margin targets in 2018, 2019 and even through most of 2020-2022 despite supply chain challenges.”

D.A. Davidson will wait to update its earnings model for Federal Signal when the company provides information about its acquisition of TowHaul, a maker of off-road towing and hauling machinery, for $46.1 million. Federal Signal has an opportunity to consolidate a variety of companies in TowHaul’s niche market.

D.A. Davidson raise its price target on Federal Signal to $46 from $39 a share, an enterprise value-to-EBITDA multiple of about 12.5 times for the next 12 months.

Federal Signal ( FSS ) has declined 6% this year, compared with a 20% drop for the S&P MidCap 400 Index ( SP400 ).

Seeking Alpha contributor The Value Investor has a Hold rating on Federal Signal ( FSS ) because of its current valuation .

For further details see: