FSS - Federal Signal: Solid Quarterly Results And A Positive Outlook

2023-11-26 01:45:08 ET

Summary

• Federal Signal recently announced solid quarterly results with a 28.8% rise in sales compared to the previous year.
• The company is experiencing solid growth despite tough market conditions and has been able to increase production levels.
• The stock has seen significant growth in a short period of time, but waiting for a retest of the breakout level may be a better option for investors.

Federal Signal ( FSS ) provides integrated solutions for governmental and commercial customers worldwide. FSS recently announced solid quarterly results. It is experiencing solid growth amidst tough market conditions. Its supply chain has been improving, which is helping them increase production levels. I think it has a great upside potential. However, I think waiting for the right levels to invest might be the right decision for now. Hence, I assign a hold rating on FSS.

Financial Analysis

FSS recently posted its Q3 FY23 results . The sales for Q3 FY23 were $446.4 million, a rise of 28.8% compared to Q3 FY22. Both segments, Environmental Solutions Group [ESG] and Safety and Security Systems Group [SSG] saw significant growth, leading to a significant sales rise. The sales from the ESG segment grew by 31% in Q3 FY23 compared to Q3 FY22. A better pricing policy and an improving supply chain that helped the company meet the strong aftermarket demand boosted the ESG segment’s sales. The sales from the SSG segment grew by 19% in Q3 FY23 compared to Q3 FY22. Its adjusted EBITDA grew to 17.6% in Q3 FY23 from 15.4% in Q3 FY22. The management’s cost-saving efforts and increased production led to increased margins.

Its net income increased by 36.1% in Q3 FY23 compared to Q3 FY22. Record quarterly sales and EPS in tough market conditions with high-interest rates in Europe and North America. It cannot get better than this, so I think the quarterly results were quite solid. In the previous quarters, the company struggled with supply chain constraints, which improved in this quarter, and they were able to boost production. Even after boosting the production, its backlog grew significantly in Q3 FY23 compared to Q3 FY22, which shows the demand it is experiencing is significant, which is impressive. The backlog was up 22% in Q3 FY23 compared to Q3 FY22. Even now, the supply chain hasn’t fully resolved, but it will improve with time. So, in the coming quarters, we might get to see increased production levels, and considering the solid demand it is experiencing, the company has increased its sales guidance for FY23, which is around $1.7 billion, which is 18.8% higher than FY22 revenue. Looking at the increased backlog, improvement in the supply chain, and robust market demand, I think it might achieve the sales guidance, which might benefit its share price in the coming times.

Technical Analysis

FSS is trading at $69.5. The growth the company is experiencing in FY23 has been significant; it is no wonder this stock has gone up by more than 115% in less than six months. The strength in the stock looks unreal, and it is trading at an all-time high. The chart of FSS looks quite tempting, but in these cases, the investors should play it smartly and utilize the opportunity in the best way possible. In my opinion, one should wait for the right opportunity and wait for the right levels before investing. After consolidating for about four months, the stock gave a breakout above the $64 level, and after giving the breakout, the stock price rose about 8% from the $64 level. Whenever a stock gives a breakout, most of the time, the price comes back to retest the breakout level. So, there is a high chance that it might also come to retest the $64 level in the short term. I believe investing during the retest will be a better option because it will maximize the gains and provide a better risk-to-reward setup. Hence, I would advise waiting for the retest and investing at that time for the long term because the chart of FSS shows that it has solid potential in the long term.

Should One Invest In FSS?

Not every day, we see a sales growth of around 29% and healthy margins in tough market conditions. It has performed well, and generally, growth companies trade at a higher valuation, and the same is the case in FSS. FSS is trading at a P/E [FWD] ratio of 27.86x compared to the sector median of 17.38x. It is trading at a premium, which I believe it deserves considering its high growth and positive outlook, and if we compare its growth to some similar firms like TEX , ALSN , and MTW , we can see that FSS has experienced higher growth than these firms. FSS has a revenue growth [YOY] of 23.88%, and TEX, ALSN, and MTW have a revenue growth [YOY] of 22.82%, 10.5%, and 18.07%.

FSS has been performing quite well, and its share price has skyrocketed in the past few months. I believe it has solid potential in the coming times, and it might be rewarding, although I think one should wait for the retest of the breakout level of $64. The retest will provide a better risk-to-reward setup and maximize the gains. The stock is due for a retest, and when the retest is done, one can enter the stock. But for now, I assign a hold rating on FSS.

Risk

They produced almost 80% of their net sales in the United States in 2022. Their capacity to turn a profit largely depends on shifting circumstances in the American municipal and government markets and the country's overall economy. The competitive industrial markets exhibit significant cyclicality, reacting to shifts in the broader business environment. Due to the fact that many of their clients are local government organizations, they are reliant on funding from these entities. Municipal customers' spending may be impacted by a variety of variables, including changing priorities, budgetary restrictions, real or anticipated government shutdowns, and political situations at the federal, state, and local levels. Because tax revenues are a major source of funding for both the federal government and local governments in the United States, historical data indicates that there is a one- to two-year lag between the state of the federal economy and sales to both entities. As such, demand for their products is anticipated to decline during downturns in the U.S. economy. According to certain market conditions, the U.S. economy might struggle in the coming times. They had declines in sales and profitability during prior economic downturns, and their business is anticipated to continue to be vulnerable to comparable economic swings going forward.

Bottom Line

FSS posted solid quarterly results with record quarterly sales and EPS. The supply chain has been improving, and the company has been experiencing solid demand. It can be rewarding in the coming times. However, I believe its chart has been stretched a bit, and the price is due for a retest. Hence, I would advise waiting and entering at the retest as it would maximize the gains and also provide a better risk-to-reward setup. Hence, I assign a hold rating on FSS.

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